Euro area inflation continues to be below ECB expectations, likely to reach 1.1 pct by end-2019

Inflation in the euro area continues to be below the European Central Bank’s expectations. The ECB, too, is likely to gradually doubt that higher wage rises will sustainably increase underlying inflation in the euro area.

Due to the late timing of Easter and Whitsun, the 2019 holiday-related price rise for package holidays falls in April and June rather than March and May as in 2019. This leads to solid fluctuations in the inflation rate for package holidays. In May it is likely to have dropped again to -2 percent, after having jumped from -3.8 percent in March to 7.7 percent in April.

As this calendar effect might have impacted other service prices, the core inflation rate excluding package holidays had also fallen to 0.6 percent in March, followed by a rise to 0.9 percent in April. In May, the rate should have eased again to 0.7 percent.

Adjusted for these calendar effects, the core inflation rate continues to oscillate around 1 percent. The sustained rise in underlying inflation expected by the ECB is therefore still to be seen. Even in the service sector, higher wage settlements have not yet led to a sustained rise in inflation. Despite the sound healthy domestic demand, firms still appear to find it difficult to pass on their higher wage costs to consumers.

“The core inflation rate of 1.2 percent forecast by ECB experts for 2019 seems once again too high in the light of recent data. We expect a rate of 1.1 percent at best. Today's price data is unlikely to allow the inflation expectations on the market, which have recently fallen sharply, to rise again. The headline inflation rate of 1.3 percent in May was again well below the ECB's inflation target of just under 2 percent”, said Commerzbank in a research.

At 14:00 GMT the FxWirePro's Hourly Strength Index of Euro was neutral at -13.147 while the FxWirePro's Hourly Strength Index of US Dollar was slightly bearish at -58.3828 more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex