Euro area inflation likely to grow significantly in H2 2016

Euro area has been recording negative inflation for four months. However, inflation is likely to accelerate considerably in the remainder of 2016, said Danske Bank in a research report.

“We look for inflation at 1.0 percent in December this year rising further to 1.5 percent in February next year after a period when inflation has not been above 1.0 percent for four consecutive years,” according to Danske Bank.

The acceleration in inflation shows a diminishing drag from energy prices following the increase in oil price to the highest level since late 2015. Inflation outlook is based on a persistent slow rise in oil price. Hence headline inflation is likely to peak in the first quarter of 2017 reflecting the most solid support from base effects when the oil price was lowest at the start of 2016, noted Danske Bank.

Aftermath, headline inflation is likely to slow marginally before steadying slightly above one percent. A sustained rise in headline inflation needs core inflation to also accelerate from the low level at present. However, core inflation is expected to accelerate slowly by the end of 2016 as a more robust recovery and lower jobless rate underpin the domestic driven part of core inflation, added Danske Bank.

Nonetheless, such support in the near term is expected to be offset by an adverse effect from the stronger effective currency. Meanwhile, a persistent downward pressure is also likely to be present because of a lagged and indirect effect from the decline of oil price through production costs, said Danske Bank.