ECB inflation hopes prove to be an illusion

In the euro zone, the underlying price momentum based on the inflation rate without the volatile prices for energy, food, alcohol and tobacco dropped again to 0.9% in November. This makes the rise in core inflation rae to 1.4% in 2016, expected in the ECB's September projection, increasingly unlikely; the somewhat higher core inflation rate in the recent months is mainly due to the devaluation-induced increase in import prices. And this effect is gradually diminishing.

"We expect the ECB to revise down its medium-term projections tomorrow and further loosen monetary policy", says Commerzbank.

The doves in the ECB Governing Council are likely to have noted the preliminary inflation data for November with a degree of satisfaction. The inflation rate stuck at 0.1%. However, more important is the fall of the core inflation rate - consumer prices without energy, food, alcohol and tobacco - from 1.1% to 0.9% (forecast: 1.0%, consensus: 1.1%).

The inflation rate for non-energy industrial goods dipped from 0.6% to 0.5%. This supports our expectation that the price-driving effect of previous euro depreciation is gradually fading. The year-on-year rate for import prices has already been declining again since May. This will dampen the rise of consumer prices for non-energy industrial goods in the coming months. The inflation rate for services even dropped from 1.3% to 1.1% in November.

"We still expect the core inflation rate to be below, rather than above, 1% in the coming year too. The clear rise in the core inflation rate expected by the ECB so far to an average of 1.4% next year has become even more unlikely with today's data. We anticipate that the ECB will correct its forecast for core inflation downwards tomorrow and use this downward revision as grounds for deciding on further expansionary measures", added Commerzbank.