Euro area’s headline inflation likely to remain below ECB’s target rate

Euro area’s headline inflation had recovered strongly, and for a brief period of time it touched the ECB target rate of 2 percent before falling back to below 1.5 percent year-on-year. Swings in road fuel price inflation mainly cause the recent rise and subsequent drop in the headline inflation. Base effects and higher oil prices stimulated inflation by a full percentage point in the six months to February 2017. But falling fuel prices have reversed half of that rise in the last three months alone. The component is expected to further subtract 0.4-0.5 percent from inflation on back of base effects in the remainder of this year, stated Scotiabank in a research report.

Given that the energy price inflation is muted, the currency bloc’s headline inflation is expected to stay a considerable margin below the ECB’s target unless there is sufficient upwards pressure from core inflation or food prices.  Food price inflation is roughly where it should be, with no compelling signal in either direction. This leaves the direction of overall inflation reliant on core inflation

Given that the GDP growth is now above trend, the output gap and slack in the economy should be narrowing. Depending on how much slack there was in the first place, this either signifies that core inflation would drop more slowly or could even rise, noted Scotiabank. Core inflation had been swinging between 0.7 percent and 0.9 percent for almost eighteen months.

“Core inflation is likely to continue rising gradually to around 1½% y/y by end-2018”, added Scotiabank.

At 23:00 GMT the FxWirePro's Hourly Strength Index of Euro was bullish at 91.1842, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at 2.95072. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

FxWirePro launches Absolute Return Managed Program. For more details, visit http://www.fxwirepro.com/invest