Euro area headline inflation figure confirms flash estimate of 1.6 pct in December

Euro area’s final inflation figures, which were released today, affirmed the flash estimates. On a year-on-year basis, the headline inflation came in at 1.6 percent, while the core rate came in at 1 percent in December. According to the details, the supercore inflation – the prices that are responsive to the business cycle – continued to pick up and came in at 1.4 percent year-on-year in December.

As wage growth continues to rise, underlying price pressures continue to build. Core inflation is low for the right reasons, or reasons unrelated to the business cycle, which should make the ECB less concerned.

The range of sub-indices is widening with increasing prices and that supercore inflation is picking up mainly because of the normalization of the economies of the Southern parts of the euro area rather than sighs of overheating in Germany.

“Looking ahead, we expect supercore inflation to continue picking up relatively fast due to lagged effects of the much higher wage growth this year, while the rest of core is likely to remain low, leaving core inflation as a whole to pick up gradually over the course of the year and exceed 1.5 percent y/y towards the end”, said Nordea Bank in a research report.

Markets are expecting very low prints in the months ahead because of declining energy prices and the ECB staff expectations for this year are way too high. Markets still expect the gradually building price pressures, but it core inflation actually picks up in the year then the longer end of the inflation curve is expected to gradually start re-anchoring to the ECB’s inflation target, at least as long as growth does not decelerate too much, added Nordea Bank.

At 19:00 GMT the FxWirePro's Hourly Strength Index of Euro was bearish at -80.8021, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at 43.992 more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex