Analyse fra Commerzbank:
The much higher core inflation rate was an additional burden on the bond market in May.
That said, it probably does not mark the beginning of a significant rise in underlying price momentum as the inflationary impact of the weak euro should largely be compensated by the after-effects of the oil price slump. Furthermore, high unemployment in many euro countries will dampen wage growth for some time yet.
The core inflation rate should therefore remain below rather than above 1% – even in 2016 – which is why the ECB is more likely to extend than reduce its asset purchase programme. Ten-year Bund yields should thus fall again over the summer. Will a brighter economy and stronger inflation stop the ECB?
A trigger for the strong rise in yields last week was brighter economic data from the euro zone: Since some investors may have been reckoning with an early end to the ECB’s bond buying programme, the latest price data are likely to have reinforced this view.
After all, the preliminary figures indicate that the core inflation rate (ex. energy and food) leapt from 0.6% to 0.9% last month. The question is whether the ECB will come closer to achieving its goal of lifting inflation to (just under) 2% sooner than generally expected? Weaker euro allows goods prices to rise … In part, one-off factors may have been responsible for the higher core rate in May.
For instance, calendar effects could have markedly raised the price of travel packages, which feeds through to services prices (Chart 1). But industrial goods prices (ex. energy) appear to have been rising at a faster pace of late. This can be explained in part by the weak euro, which has caused the prices of imported non-energy industrial goods to rise by a good 2% in the past 12 months, whereas twelve months ago the annual rate of inflation for this category was still about -2% (Chart 2). Importers seem to be increasingly passing higher prices on to consumers.
As further price increases should be on the way, and we also expect a further depreciation of the euro over the remainder of the year, this suggests a further rise in the core inflation rate. … but lower oil price is applying the brakes That said, the collapse in oil prices in the second half of last year will act as a counterweight for some time to come. By dampening energy prices, a lower oil price reduces production costs for other goods and services.
Therefore with some degree of lag, prices in other areas will increase more slowly or even fall.
But which of these two factors will predominate in the coming months? Our simulation, based on empirical results from the ECB1 and our forecasts for the euro exchange rate and the oil price2 , indicate that these two effects will largely balance each other out in 2015 and 2016 (Chart 3). The “euro effect” will increase through to the beginning of 2016 but the “oil effect” will also strengthen a little in the coming quarters – despite the recent rise in the oil price and our expectation of further gains.
And in contrast to the euro effect, the oil effect will not ease in the latter months of 2016 but should last for around three years according to ECB estimates. On balance, these two effects point to a somewhat higher core inflation rate in the remaining months of 2015 but also a slightly lower rate again in the coming year. A rise of the same magnitude as May cannot be explained on the basis of oil or the currency.
High unemployment is dampening wages and hence also prices Of course, the core inflation rate is not only affected by changes in the external value of the euro and the oil price. Its underlying trend is primarily steered by the economy and particularly the labour market situation. Since the start of monetary union, the unemployment rate has shown a strong correlation (with a time lead of one year) with the core inflation rate (Chart 4).3
This relationship between the unemployment rate and underlying inflation is not very surprising; the labour market situation has a major influence on wages, which are in turn a key driver of business costs and therefore largely determine price fixing. Although the unemployment rate has fallen in the past two years, the decline has merely been one percentage point over this period and, at a current rate of 11.1%, it is still more than two percentage points above the level prevailing when the core inflation rate was last between 1.5 and 2%.
On account of the lead time of the unemployment rate over the core rate, this signals at most a slightly higher core inflation rate through to mid-2016. And as high levels of private debt and slowing demand from the emerging markets should prevent much of an upswing in the euro zone,4 the unemployment rate is unlikely to fall any faster in the coming months.
Consequently, the underlying inflation rate should also pick up slowly at best in the latter part of 2016
