Euro area core inflation remains subdued in November, ECB to revise down inflation outlook in December

Euro area core inflation rate continues to be subdued. The core rate came in below expectations at 1 percent in November. The preliminary data released today showed that the service price inflation was subdued in France and Germany. Even if the German softness was partially because of the volatile package holiday component, the general softness suggests that the price pressures have not yet followed the higher wage rises as was anticipated, noted Nordea Bank in a research report. The consumer price inflation dropped to 2 percent in the month, owing to the recent fall in the oil price.

The concerning factor is that the jobless rate has stayed the same at 8.1 percent since July. Even if unemployment numbers give a slightly more positive picture of the outlook, it appears that the stickiness in the euro area labor market has begun to hit the economy. Moreover, slower rebounds in the labor market are likely to lower the rate of wage inflation, stated Nordea Bank.

Meanwhile, the European Central Bank will be publishing its new macroeconomic projections in December. It is very much likely that the outlook for inflation and growth would be downwardly revised. The data surprises since the September meeting have been negative and even more significantly, the euro area outlook has softened because of the increased uncertainty in the global and political environment.

Nevertheless, the ECB is expected to give up on its strong belief that the higher wage rises would finally push up consumer prices in the euro area.

“One part of the reasoning is that although the November numbers were weaker than expected, most of the downside surprise came from the German package holidays and the ECB is likely to look through that type of data points. Thus, we expect the ECB core inflation profile to continue to be rising in the coming years”, said Nordea Bank.

This suggests that the central bank can carry on with its plans to stop the net asset purchases at the end of 2018. Nevertheless, the continuous negative surprises have evidently increased risks that the rate hikes are further delayed.

“Our expectation still is that the first rate hike will come in December 2019 but that forecast assumes that the political challenges related mainly to Italy, Brexit and trade war do not worsen”, added Nordea Bank.

At 12:00 GMT the FxWirePro's Hourly Strength Index of Euro was bullish at 91.5244, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bullish at 55.4135. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex