Euro area’s headline inflation accelerates in May on higher energy prices

Euro area’s headline inflation returned to target temporarily because of higher oil prices. Consumer price inflation rose to 1.9 percent year-on-year in May from April’s 1.2 percent, reaching the ECB’s target of close to but below 2 percent. Core inflation rose to 1.1 percent year-on-year from the extremely low 0.7 percent year-on-year in April.

The headline figure was mainly driven by energy prices, which contributed as much as 0.6 percentage points to the rise. Meanwhile, the rise in core inflation in May proves that the April softness was because of temporary factors, probably related to the timing of Easter, and particularly the package holiday prices are expected to have recovered and added to the rise in service prices in May. Therefore, the overall picture of sluggish core inflation is not altered and core rate is expected to come in at 1.1 percent in 2018 and 1.4 percent in 2019, stated Nordea Bank in a research report.

Non-energy industrial goods prices are almost not rising, which might still be lagged effects of last year’s appreciation of the EUR and the modest wage pressures in the manufacturing sector.

Energy prices are expected to keep headline inflation elevated for a few months, but its contribution might gradually slow and even turn negative, if oil prices are to follow the path suggested by the oil futures, noted Nordea Bank.

Annual core inflation is expected to stay around the current levels until autumn, where a gradual rise to a level around 1.5 percent is expected. But on sequential basis, core inflation is expected to see a gradual rise in the months ahead. The ECB staff projections, which would be presented at the June meeting, might show an upward revision to headline inflation for 2018 and 2019.

“The low core inflation projection is the main reason why we expect the ECB to extend its QE programme from the current EUR 30bn per month until September, by EUR 15bn per month for six more months”, added Nordea Bank.

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