19 Dec 2014
Euro inflation set to decline to -0.5% and remain negative until Q4 15 – Danske
FXStreet (Barcelona) - The Danske Bank Research Team anticipate the continued decline in oil price to lead to negative euro inflation in December, and forecast it to remain negative until Q4 15.
Key Quotes
“In our view, the continued decline in the oil price should result in negative euro inflation in December and we now forecast it will remain negative until Q4 15. This implies that average inflation should also be negative at -0.1% in 2015 (revised down from 0.4%).”
“Our forecast for inflation in 2015 is clearly below consensus of +0.6% and is also below the ECB’s projection that inflation will be +0.7% in 2015. However, the ECB has estimated that inflation would be around +0.3% in 2015 if the development in the oil price and oil price futures until the beginning of December were incorporated in the ECB’s projection. Including the oil price fall in December and the further fall in the forward market would probably give an even lower forecast.”
“The ECB is currently reassessing the broader impact of recent oil price developments on inflation expectations and wage formation. In our view, there have been some signs of ‘second round effects’ where wages follow inflation lower, as wage compensation is down at 1.3% y/y.”
“Although consumers are still getting decent real wage growth, the risk is that inflation is shifting to a lower equilibrium level below 2% as wage earners become satisfied with lower wage increases. For the ECB to get inflation higher, it should provide enough stimulus to (a) convince wage earners that they should expect 2% inflation and (b) generate enough demand to bring unemployment down and dampen the downside pressure on wage increases.”
“The change in our forecast for euro inflation thus reflects our new commodity price forecast – we now expect the price of Brent crude oil to bottom in Q1 next year at around USD58/bl (revised from USD87/bl) and average USD67/bl in 2015 (revised down from USD93/bl).”
Key Quotes
“In our view, the continued decline in the oil price should result in negative euro inflation in December and we now forecast it will remain negative until Q4 15. This implies that average inflation should also be negative at -0.1% in 2015 (revised down from 0.4%).”
“Our forecast for inflation in 2015 is clearly below consensus of +0.6% and is also below the ECB’s projection that inflation will be +0.7% in 2015. However, the ECB has estimated that inflation would be around +0.3% in 2015 if the development in the oil price and oil price futures until the beginning of December were incorporated in the ECB’s projection. Including the oil price fall in December and the further fall in the forward market would probably give an even lower forecast.”
“The ECB is currently reassessing the broader impact of recent oil price developments on inflation expectations and wage formation. In our view, there have been some signs of ‘second round effects’ where wages follow inflation lower, as wage compensation is down at 1.3% y/y.”
“Although consumers are still getting decent real wage growth, the risk is that inflation is shifting to a lower equilibrium level below 2% as wage earners become satisfied with lower wage increases. For the ECB to get inflation higher, it should provide enough stimulus to (a) convince wage earners that they should expect 2% inflation and (b) generate enough demand to bring unemployment down and dampen the downside pressure on wage increases.”
“The change in our forecast for euro inflation thus reflects our new commodity price forecast – we now expect the price of Brent crude oil to bottom in Q1 next year at around USD58/bl (revised from USD87/bl) and average USD67/bl in 2015 (revised down from USD93/bl).”