ECB likely to lower inflation projections this month; Eurozone 2019 CPI seen at 1.7 pct y/y, says Commerzbank

The European Central Bank is expected to lower its inflation projections this month, with the eurozone’s annual average inflation rate of 1.7 percent in 2019, after an expected 1.8 percent this year, according to the latest research report from Commerzbank.

In the euro zone, the core inflation rate fell back to 1.0 percent in November. The jump to 1.1 percent in October was therefore, as had been expected, not the beginning of a sustained increase.

The higher wage increases have not yet noticeably increased inflation in the euro zone. The inflation rate excluding energy, food, alcohol and tobacco fell back to 1.0 percent in November. It is thus on a par with the average for the first eleven months of the year.

Thus, the ECB's projections for the core inflation rate would once again prove to be too high. It will have to revise its projection in December once again downwards, at least for the years 2018 (previously: 1.1 percent) and 2019 (previously: 1.5 percent).

Nonetheless, in view of the recent somewhat higher wage increases, the ECB should remain confident that the underlying inflation will soon increase. The sharp rise in energy prices and higher import prices due to the weak euro should also tend to lead to a higher core inflation rate, the report added.

But this will only work if companies are able to pass on the higher production costs to consumers. If the economy weakens more than expectations, this could put a stop to the ECB's calculations. After all, weaker demand reduces companies' room for manoeuvre in pricing.

Meanwhile, the inflation rate for all goods fell to 2.0 percent in November. It thus remains close to the ECB's target of just under 2 percent. Due to the development of energy prices, however, the inflation rate should fall well below 2 percent again in the course of 2019.