Nordea Research : Euro Area Inflation

1. e-markets.nordea.com/article/44035/euro-area-inflation-updated-forecast-supports-
gradual-ecb-exit
18 April 2018
Euro-area inflation:
Updated forecast
supports gradual ECB exit
Tuuli Koivu | Anders Svendsen
We have lowered our Euro-area inflation profile a tad, supporting our dovish
ECB view. The final March core inflation print confirmed the flash, but
momentum in super core inflation continues to rise.
Earlier today, we published two larger research notes on inflation:
• Nordea On Your Mind: The end of cheap labour: https://ndea.mk/research-
noym1804
• Inflation at an inflection point: https://ndea.mk/Inflation_report
• Invitation to webinar: https://ndea.mk/NOYMinflationwebinar
This note updates our Euro-area inflation forecast and adds a few comments to the final March print.
Updated inflation profile – one notch down
We take our Euro-area core inflation forecast down by 0.1 %-points to 1.1% for 2018 and to 1.4% in 2019. In
the same vein, the headline inflation numbers decline to 1.3% both for 2018 and 2019. Flat headline profile
is partly due to the declining futures curve which implies that the contribution from oil will turn negative in
2019.

2. e-markets.nordea.com/article/44035/euro-area-inflation-updated-forecast-supports-gradual-ecb-exit
Chart 1. Euro-area inflation profiles
The revisions to the forecasts are small as most of the recent data has supported our earlier views on the
Euro-area inflation. The very low monthly observations in the second half of 2017 turned out to be temporary
but at the same time, monthly changes in core are yet to gain pace in order to take annual inflation numbers
substantially closer to the ECB target. The base eects from last spring and summer are likely to keep annual
numbers at around current levels until autumn but by looking at the monthly numbers, the picture should get
more positive step by step.
Gradually tighter labour markets
We continue to expect that Phillips curve does exist in the Euro area and the robust economic development
will result into a tightening in the labour market. Although the unemployment rate is still high in a number
of Euro-area countries, there is anecdotal evidence that the wage increases, which finally started to gain
pace already last year, are going to accelerate further in 2018. Recovery of inflation expectations is likely to
facilitate this process. It is however useful to bear in mind that no matter whether we look at unemployment,
wage increases or inflation expectations, we are still below the levels seen prior to the crisis and 1½-2
years behind the US developments, which keeps the upside inflationary pressures limited for now. A lot
of uncertainty is also related when it comes to the future development of companies’ pricing power and
productivity development which could either compensate higher labour costs or boost the trend further.

3. e-markets.nordea.com/article/44035/euro-area-inflation-updated-forecast-supports-gradual-ecb-exit
Chart 2. Pre-crisis lows in unemployment could be hit around May 2019

4. e-markets.nordea.com/article/44035/euro-area-inflation-updated-forecast-supports-gradual-ecb-exit
Chart 3. Tighter labour market speaks for slightly higher wage increases and
inflation
Strong EUR to be a drag in the near term
The surprisingly low core inflation print in March came mainly from non-energy industrial goods (NEIG). NEIG
dropped to 0.2% y/y in March from 0.6% y/y in February and with a weight of around a fourth of the total CPI
basket, it pulled 0.1-0.2% points out of core inflation.
Goods prices are obviously much more exposed to international competition than services prices and could
reflect lagged eects of the stronger EUR. On the other hand, industrial goods are at the epicentre of the
Trump administration’s tari war, which – if widening – could put an upwards pressure on prices in the
medium term.

5. e-markets.nordea.com/article/44035/euro-area-inflation-updated-forecast-supports-gradual-ecb-exit
Chart 4. Strong EUR eect on durables prices
The March numbers left some questions regarding the very recent inflation developments more generally.
When seasonally adjusted, the monthly change in the service prices was surprisingly low. While there are
country dierences, there are no signs service price inflation have picked up recently. Given that we expected
the early timing of Easter to have a positive impact on March numbers, those numbers were disappointing.

6. e-markets.nordea.com/article/44035/euro-area-inflation-updated-forecast-supports-gradual-ecb-exit
Chart 5. Service price developments do not indicate any acceleration so far
ECB to hike in late 2019
Inflation outlook will play a key role when the ECB takes steps to exit from its exceptionally loose monetary
policy in the coming months. In our updated inflation forecast core inflation accelerates only gradually and
remains clearly below the ECB target at the end of 2019. That supports our view which foresees the ECB
exit to be a gradual process. We expect the ECB to continue asset purchases at a declining pace until the
end of first quarter of 2019 and raise interest rates for the first time towards the end of 2019. We expect the
decision on the continuation of the asset purchase programme to be delayed until the July meeting if inflation
numbers in April-May do not change the outlook of fragile inflation.
Final March print
The final March print did not spring any major surprises. Inflation excluding food, energy, alcohol and tobacco
was confirmed at 1.0%, while headline inflation was revised down a tad to 1.3%.
The underlying momentum in super core inflation continued to pick up, while the downside surprise to
the flash numbers came from non-energy industrial goods and more precisely the details single out one
component.
Momentum in super core inflation is even higher when excluding the notoriously volatile package holiday
prices that somehow failed to rise ahead of the early Easter.

7. e-markets.nordea.com/article/44035/euro-area-inflation-updated-forecast-supports-gradual-ecb-exit
Still, even without package holidays our super core inflation measure stands at 1.2%, hardly warranting any
lifted eyebrows at the ECB.
Chart 6. Most super core components are rising...
Chart 7. … and momentum is getting stronger

8. e-markets.nordea.com/article/44035/euro-area-inflation-updated-forecast-supports-gradual-ecb-exit
Tuuli Koivu
Senior Analyst
Tuuli.Koivu@nordea.com
+358 9 5300 8073
Anders Svendsen
Chief Analyst
anders.svendsen@nordea.com
+45 55467229

9. 28.9.2017 1
Nordea Bank AB
Hamngatan 10 SE-105 71 Stockholm www.nordea.com
DISCLAIMER
Nordea Markets is the commercial name for Nordea’s international capital markets operation.
The information provided herein is intended for background information only and for the sole use of
the intended recipient. The views and other information provided herein are the current views of
Nordea Markets as of the date of this document and are subject to change without notice. This notice
is not an exhaustive description of the described product or the risks related to it, and it should not be
relied on as such, nor is it a substitute for the judgement of the recipient.
The information provided herein is not intended to constitute and does not constitute investment
advice nor is the information intended as an offer or solicitation for the purchase or sale of any
financial instrument. The information contained herein has no regard to the specific investment
objectives, the financial situation or particular needs of any particular recipient. Relevant and specific
professional advice should always be obtained before making any investment or credit decision. It is
important to note that past performance is not indicative of future results.
Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or
regulatory matters in any jurisdiction.
This document may not be reproduced, distributed or published for any purpose without the prior
written consent from Nordea Markets.