Euro area’s annual inflation decelerates below zero again in January, core rate low on slow wage rise

Euro area annual inflation decelerated to -0.2% in February, as compared with 0.3% in January. On a monthly basis, prices rose only 0.1% m/m, 0.5 percentage points less than in 2015. Four of the major euro nations recorded negative inflation.  The core rate, excluding tobacco, food, alcohol and energy, dropped to 0.7% y/y, from 1%, which is a more concerning sign for the ECB. The main reason for the low core rate is that wages are barely increasing.

Oil prices are expected to be the most important short-term driver of the inflation rate. If the Brent price rises gently in the coming months, and the EUR depreciates against the US dollar to 1.05 until June, inflation rates are likely to be around zero in Q1 and Q2. Later, rates are likely to rise to around 1% by the end of 2016, due to base effects as oil prices have declining considerably in H2 2015. This should also increase inflation expectations.

The ECB is unlikely to wait for that as Draghi will not want to disappoint markets. The ECB is expected to lower the deposit rate by 10 bp and increase asset purchases by EUR 10 billion during its meeting in March.