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Euro area inflation close to ECB target in May

Summary:
Latest figures may increase the ECB’s confidence that inflation will get to 2% in the medium term, but its gradualist approach to policy normalisation should continue.At 1.9% in May, euro area headline inflation is back close to the ECB’s target of 2%. Importantly, it was not only energy and food prices that pushed inflation higher, but also core consumer prices (up 1.1% y-o-y).Looking ahead, headline inflation is likely to remain close to 2% for most of the rest of the year. Core inflation is expected to hover around 1% before stronger base effects and a narrowing of the output gap provide another push higher in Q4 2018, to around 1.3-1.4%. On a forward-looking basis, the ECB is likely to conclude that we are getting closer to a sustained adjustment in inflation that is a necessary

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Latest figures may increase the ECB’s confidence that inflation will get to 2% in the medium term, but its gradualist approach to policy normalisation should continue.

Euro area inflation close to ECB target in May

At 1.9% in May, euro area headline inflation is back close to the ECB’s target of 2%. Importantly, it was not only energy and food prices that pushed inflation higher, but also core consumer prices (up 1.1% y-o-y).

Looking ahead, headline inflation is likely to remain close to 2% for most of the rest of the year. Core inflation is expected to hover around 1% before stronger base effects and a narrowing of the output gap provide another push higher in Q4 2018, to around 1.3-1.4%. On a forward-looking basis, the ECB is likely to conclude that we are getting closer to a sustained adjustment in inflation that is a necessary condition for ending QE this year.

On balance, the ECB is still likely to wait until the 26 July meeting to announce its looming decisions on QE and forward guidance. We continue to expect QE to end in December 2018 and a first rate hike to be delivered in September 2019.

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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