Euro area headline inflation likely to accelerate to 1.7 pct in 2017, says Barclays

The euro area headline inflation is expected to accelerate higher in 2017. The global inflationary pressures, driven by food and energy prices are expected to be the main supportive forces, noted Barclays in a research report.

“We now expect headline inflation to rise to +1.7 percent in 2017 from our previous forecast of +1.2 percent, and +0.2 percent in 2016. We expect core prices to edge up to +1.0 percent in 2017 from +0.9 percent in 2016”, said Barclays.

The small rise is greatly because the current weak underlying inflation trend is likely to continue as labor market developments that have unfolded in the last few years continue to be a drag on domestic pressures for most of 2017. For 2018, the headline inflation is expected to slow down to 1.4 percent, while the core inflation is expected to rebound to 1.3 percent. The waning of the solid upward pressures from oil prices and stabilizing food prices are expected to result in a considerable decline in headline inflation.

Services prices are expected to accelerate slightly to underpin the ongoing increase in the prices of non-energy industrial goods that are likely to be slower than in 2014-2015.

“Our monthly profile for headline inflation peaks in April and September 2017 to +1.9 percent, ie, close to the ECB medium-term target, before it declines to 1.3 percent by the end on 2018”, said Barclays.

In the meantime, core inflation is expected to keep lingering around the present level of 0.9 percent until the end of third quarter of 2017, before it accelerates a tad to 1.4 percent in the fourth quarter of 2018.

Additional rises in oil prices, quicker than expected euro NEER depreciation and core domestic consumer goods producer prices might give an additional boost to headline and core HICP inflation, stated Barclays. In the meantime, longer-than-anticipated continuation of stagnant wage inflation trend might be a drag on services prices more than expected.