Lower oil price challenges ECB’s outlook for sustained inflation path

The oil price has declined considerably since the ECB published its latest inflation projections in June and the sharp drop clearly increases the risk of a new period of deflation in the euro area. In addition, the Brent forward curve, which the ECB uses as input in its projections, is pricing a much lower oil price in 2016-17 implying the ECB's outlook for a sustained adjustment in inflation in the medium term is under threat, states Danske Bank. 

On the other hand, the lower oil price also has some reflationary effects as it eventually supports wage pressure by strengthening domestic demand through higher consumers' purchasing power.