Eurozone: Headline CPI to edge up into early 2017, core to stay weak - RBS

Research Team at RBS, forecasts the Euro area’s headline HICP inflation to pick up on energy base effects, reaching a high of 1.4% in early 2017.

Key Quotes 

“As base effects recede, we expect headline inflation to decline back to sub1% levels over an 18 months horizon. Headline HICP is estimated to average 0.2% y/y in 2016 (below the Bloomberg consensus of 0.3% and in line with the ECB’s forecast) and 1.0% y/y in 2017 (below the 1.3% Bloomberg consensus and the 1.2% projected by the ECB).

On Core CPI, we expect inflationary pressures to ease slightly over the coming months, edging down slowly to 0.7% y/y in mid2017. We forecast Core CPI inflation to average 0.7% y/y in 2017, below the ECB’s latest forecast of 0.9% (September staff projections), which would still indicate no recovery in core inflationary pressures from the current depressed levels.

Our sub-consensus inflation forecasts derive from: (i) sub-trend GDP growth persisting, resulting in further widening of the output gap (ii) benign cost pressures: an ongoing subdued wage inflation and input prices.”