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Rebound in euro area core inflation

Summary:
While core inflation was slightly stronger than expected in June, we believe it will rise only slowly for the rest of this year.Euro area ‘flash’ HICP inflation eased to 1.3% y-o-y in June (down from 1.4% in May) while core inflation increased to 1.1% (up from 0.9% in May). Both figures were slightly above consensus expectations, but our overall assessment is unchanged. The bottom line from the June inflation report is that the broad picture remains unchanged – we continue to expect euro area core inflation to rise only very slowly in the months ahead.The main boost to core inflation in June came from services inflation, which rebounded to 1.6%, from 1.3%. This was probably due to exceptional factors such as the timing of the Pentecost holiday in Germany or the sales discount in France,

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While core inflation was slightly stronger than expected in June, we believe it will rise only slowly for the rest of this year.

Rebound in euro area core inflation

Euro area ‘flash’ HICP inflation eased to 1.3% y-o-y in June (down from 1.4% in May) while core inflation increased to 1.1% (up from 0.9% in May). Both figures were slightly above consensus expectations, but our overall assessment is unchanged. The bottom line from the June inflation report is that the broad picture remains unchanged – we continue to expect euro area core inflation to rise only very slowly in the months ahead.

The main boost to core inflation in June came from services inflation, which rebounded to 1.6%, from 1.3%. This was probably due to exceptional factors such as the timing of the Pentecost holiday in Germany or the sales discount in France, with a modest setback possible next month.

Unless oil prices rebound and/or the currency depreciates significantly from here, headline inflation is at risk of falling more significantly at the beginning of 2018 and the ECB staff forecasts could be lowered in September. This strengthens our view that a QE tapering announcement is likely to be postponed to October or December 2017.

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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