Eurozone inflation likely to rise on rebound in global commodity prices

Eurozone inflation is expected to rise in the coming months as the plunge in global commodity prices has reversed, only to raise hopes of a growth in the Euro area amid mounting worries over the June 23 referendum.

Jan-May inflation was flat on the year, weighed by a -7.7 percent drop in energy price inflation. This is, however, likely to reverse in the second half of 2016 as base effects from low commodity prices abate and the over 50 percent rally in Brent prices, in euro terms feed into the underlying price momentum. This is expected to be sufficient to keep inflation later this year in modest black and average a tepid 0.2 percent y/y this year, DBS reported.

The European Central Bank raised its 2016 crude prices estimate to USD43.4/bbl from USD34.9/bbl back in March, 2016. While headline inflation remained steady in Jan-May, core inflation averaged 0.9 percent y/y compared to 2015’s 0.8 percent.

"Following the upward revisions in the first quarter of 2016 GDP numbers earlier this week and the likelihood for recovery to stabilize this year, the ECB will need to guard against tightening financial conditions as it juggles upbeat growth numbers, whilst inflation remains weak," DBS mentioned in a research comment.

According to an estimated by the brokerage, headline inflation is expected at 0.8 percent next year.