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Drop in euro area inflation amplified by statistical distortions

Summary:
Euro area headline inflation declined by a larger margin than expected. Our main explanation is related to statistical effects.Euro area headline inflation declined for the first time in almost a year, by a larger margin than expected by the consensus. Headline HICP eased to 1.5% in March, from 2.0% in February, while core HICP inflation (excluding energy, food, alcohol and tobacco) dropped to a two-year low of 0.67% y-o-y, from 0.86% in February. The harmonised inflation rate dropped by 70bp in Germany (to 1.5%), by 90bp in Spain (to 2.1%) and by 30bp in Italy (to 1.3%). It remained stable in France (at 1.4%) as a sales discount effect was reversed.The main explanation for the disappointing core inflation figure is related to statistical effects, in our view, including the timing of the Easter break in Germany which should be reversed next month as services prices rebound (transportation, restaurants, package holidays). We forecast headline inflation to rebound to 1.7% in April, with core inflation up to 1.0%.Looking ahead, the outlook for price stability remains uncertain despite the stronger economic recovery. This should help ECB doves in the short term, although we continue to expect a change in communication at the June meeting, including a more neutral balance of risks and an adjustment in forward guidance on the deposit rate.

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Euro area headline inflation declined by a larger margin than expected. Our main explanation is related to statistical effects.

Euro area headline inflation declined for the first time in almost a year, by a larger margin than expected by the consensus. Headline HICP eased to 1.5% in March, from 2.0% in February, while core HICP inflation (excluding energy, food, alcohol and tobacco) dropped to a two-year low of 0.67% y-o-y, from 0.86% in February. The harmonised inflation rate dropped by 70bp in Germany (to 1.5%), by 90bp in Spain (to 2.1%) and by 30bp in Italy (to 1.3%). It remained stable in France (at 1.4%) as a sales discount effect was reversed.

Drop in euro area inflation amplified by statistical distortions

The main explanation for the disappointing core inflation figure is related to statistical effects, in our view, including the timing of the Easter break in Germany which should be reversed next month as services prices rebound (transportation, restaurants, package holidays). We forecast headline inflation to rebound to 1.7% in April, with core inflation up to 1.0%.

Looking ahead, the outlook for price stability remains uncertain despite the stronger economic recovery. This should help ECB doves in the short term, although we continue to expect a change in communication at the June meeting, including a more neutral balance of risks and an adjustment in forward guidance on the deposit rate.

Frederik Ducrozet
Mr. Frederik Ducrozet is a Senior Econoist at Banque Pictet & Cie SA, Research Division. Prior to this, he served as Senior Eurozone Economist at Credit Agricole Corporate and Investment Bank, Research Division from June 2006 till September 2015. He joined Crédit Agricole SA in 2005. Mr. Ducrozet contributed to the various publications of the research department, with a special focus on macroeconomic developments in Eurozone countries, including on the outlook for fiscal policy and the ECB’s monetary policy. Do not hesitate to contact Pictet for an investment proposal. Please contact Zurich Office, the Geneva Office or one of 26 other offices world-wide.

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