Euro-area inflation accelerated more quickly than expected

Euro-area CPI inflation accelerated to 0.3% y/y in May, according to the preliminary estimate, up from 0.0% in April. At the 3 June post-meeting press conference, Draghi said this was in line with ECB expectations and adds to the evidence that the governing council has taken the correct measures. This is the first positive inflation print since November 2014, after a low of -0.6% in January. Moreover, core CPI inflation accelerated to 0.9% y/y, the fastest growth since August 2014. 

Two major factors are behind this rapid turnaround: the sharp rise in oil prices since January, of c.50% in euro (EUR) terms; and the sharp depreciation of the EUR during the last 12 months, of c.10% in trade-weighted terms. Near-term, headline CPI inflation is believed to be accelerate further, and will likely move close to the ECB's target of "below but close to 2%" around the turn of the year, says Stnadrad Chartered. This is premised on our oil-price outlook of USD 98/barrel by Q1-2016. 

Core CPI inflation likely to trough (0.6%) in April; it may revert back slightly during the summer due to base effects but then it  expect to rise, though much more gradually than headline CPI, according to Standard Chartered. 

The direct effect of falling oil prices on energy-related goods, such as car fuel, is fading gradually and will likely disappear around Q3- or Q4-2015. The indirect effect on those goods within the CPI basket that use oil as a major input is more difficult to estimate; however, according to an ECB study, the impact peaks around six months after the change in the oil price and can continue for up to three years.