The European Central Bank Thursday said that base effects from food and energy prices should have a cumulative upward impact of around 0.5 percentage points on inflation levels in 2014.
In its Monthly Bulletin, the Bank also projected that the pass-through of indirect tax increases should add another 0.2 percentage points to the full year headline figure.
“It is estimated that these base effects will have a cumulative upward impact of around 0.5 percentage point on annual HICP inflation over the period from December 2013 to December 2014,” the report said. “This will mostly reflect the contribution of the base effects stemming from energy prices, as that from food prices will remain modest in absolute terms.”
Tax measures introduced in 2013 continue to work their way through, the central bank said. In conjunction with measures announced for 2014 “the mechanical upward impact for 2014 is estimated to be, on average, 0.2 percentage point.”
“However, these mechanical impacts are likely to represent an upper bound,” the central bank cautioned, noting that actual impacts will hinge on various elements including firms’ pricing strategies and the strength of consumer demand.
The Survey of Professional Forecasters, also released in the Monthly Bulletin showed that sharp downward revision in 2014 inflation forecasts to 1.1% from 1.5% seen in November. Forecasters also lowered the 2015 forecast to 1.4% from 1.6%. Medium-term inflation expectations still hover around the 1.9% level.