Brent crude price and Extensive manufacturing capacity impacts EZ’s core CPI

The April's CPI flash numbers for the euro area is due to be released today. This CPI figure likely remained in negative territory (at -0.1% yoy). However, we expect core CPI to have eased again to 0.5% yoy basis. The 50% rise in the Brent crude price in euro (EUR) terms has been a booster since January means the monthly inflation trend is upwards, but the EUR oil price is still 25% cheaper than one year ago.

Extra facility in the euro area remains extensive and a few years of above trend growth are needed to eliminate it. Signs of solid wage growth in Germany indicate spare capacity is being eliminated, but such signs have not yet appeared in the weaker countries.

We believe that headline CPI will bottom soon and begin an uptrend. We think core CPI still has some room to go before bottoming due to the lagged effects of the low oil price on non-energy-related goods and services.

Currently EUR-USD extended to a three-week peak of 1.1096, 1.3907 against AUD and 131.5900 against Yen.