Euroarea headline inflation likely to accelerate above 1 pct in January 2017

Euro area’s consumer price inflation has remained positive for five straight months and is likely to continue to accelerate until February 2017. It is expected to rise above 1 percent in January for the first time since September 2013 as the rise in oil price should turn into an inflation tailwind, noted Danske Bank in a research report. But a sustained acceleration in inflation is unlikely to follow yet as the support from the oil price is expected to wane again and as the underlying price pressure continues to be too weak to accelerate inflation.

“Our forecast is inflation of 1.2 percent in 2017, increasing slightly to 1.3 percent in 2018”, added Danske Bank.

Meanwhile, core inflation has remained benign and not followed the recent upward trend in the headline inflation. In 2015, core inflation temporarily accelerated to 1.1 percent, underpinned by the earlier euro depreciation; however, the lack of a continued weakening of the euro reversed the trend quickly.

Looking into 2018, core inflation is expected to accelerate on slightly stronger wage pressure, which would lift the labor dependent service price inflation, said Danske Bank. But the rise is expected to be quite modest as most of the nations still have labor market slack. Germany has a strong labor market with record low jobless rate, but it has not yet lifted wage growth. This suggests that it would take a longer time before the remainder of the euro area nations will see higher wage pressure, according to Danske Bank.