Euro area's headline inflation likely to increase marginally in H2 2015

Renewed weakness in oil prices is threatening the recovery in Euro area's inflation which climbed back from zero in the second quarter. The turnaround in headline HICP inflation was a result of the waning impact of lower energy prices and higher food commodity prices. 

"Given the base effects from the sharp decline in oil prices towards the end of 2014, the Brent forecasts of $47.5/b, and the estimated depreciation of the EUR/USD to 1.05 towards the end of 2015, headline inflation is expected to increase marginally in H2 2015", says Societe Generale. 

While food prices continue to increase and contribute to inflation, oil prices have plunged back to around $40 per barrel, keeping the energy contribution negative. 

"The commodity forecasts indicate a recovery in oil prices to $60 per barrel and parity for the EUR/USD by end-2016 which would lead to a rebound in inflation in 2016", added Societe Generale. 

But the scenario could change dramatically if the EUR/USD does not fall as expected and if oil prices, after their recent plunge, stay close to current levels, as a 10% depreciation in oil prices leads to a 25bp drop in headline inflation.