Core inflation (total excluding energy, food, alcohol and tobacco) increased to 1% (from 0.7%). The Easter effect becomes visible here and also in service prices, now 1.6% y/y (up from 1.1%).
What does it mean for the next ECB meeting? With this outcome, policy makers are unlikely to cut rates or to take other major decisions (they might act on the liquidity front). To change that picture, EURUSD would have to strengthen significantly or stressed money market conditions would have to fail to improve.
Longer out, the important question is, whether core inflation slowly picks up in the wake of the (subdued) recovery. Despite the dip in economic sentiment that was reported yesterday, we do expect the recovery to go on this year and next and the disinflationary pressure to ease over time. We trust that the ECB will look through the period of very low inflation. A new fall in inflation (expectations) could challenge that view.
We expect inflation to remain below 1% during Q2 and to move above 1% only in the second half of this year. Due to the low inflation numbers from January to April, we change our forecast for this year’s annual annual average to 0.8% (from 1%).
Market take
After yesterday’s German inflation numbers, 0.7% was working towards being the new consensus. Consistent with this, immediate market reactions are quite subdued, but the headline inflation reading of 1.0% is actually quite promising and is helping lifting the short end of the inflation swap curve.
The market interpretation – at least the immediate one – seems to be that yes, 0.7% HICP is a quite low reading, but it’s not a very low reading and it’s not a number that conclusively spikes the market perception of ECB easing already next week which is a sentiment that we share. Also, the 1.0% headline inflation reading reduces the pressure on the ECB for immediate action.
Nordea