Euro area inflation likely to have accelerated further to 1.6 pct in January

Euro area’s flash inflation data for January is expected to show that the currency bloc’s inflation accelerated further in January. According to a Nordea Bank research report, euro area HICP inflation is expected to have climbed to 1.6 percent in January from December’s 1.1 percent.

The expected rise in the euro area’s headline inflation is mostly because of the oil price that was at record low in the January and February of 2016. Thus the hawkish arguments would be softened by the persistent moderate core inflation anticipated at around 1 percent.

The monthly rise in core inflation had surprised on the upside in December; but a more careful analysis has showed that the rise was mainly driven by German prices for package holidays and accommodation. Therefore, it is quite unlikely that comparable positive surprises would be witnessed in the months ahead. The recent evidence from PMIs show that general prices pressures stay moderate even if higher input prices are pushing up manufacturing prices globally, noted Nordea Bank.

In the autumn of 2017, when the European Central Bank is likely to undertake its next tapering decision to be prepared for implementation in the first half of 2018, core inflation is likely to have accelerated closer to 1.5 percent, providing a strong basis for decision making. Meanwhile, movements in the headline inflation are likely to be continued to be dominated by the oil price base effects that might keep inflation above 1.5 percent for the months ahead. German inflation is likely to have accelerated to 2 percent in January.