Euro inflation to be lifted by recovery in the oil price in 2015

A higher oil price is expected based on 1) a steep decline in US rig count, 2) downward revisions to IEA, non-OPEC supply forecasts, 3) a softer stance from OPEC on oil prices, 4) stronger European oil demand supported by the ECB and 5) an expected correction following an undershooting of the medium-term equilibrium price.
 
Nevertheless, there are also a number of factors pointing to a bumpy recovery and we see it as likely that the volatility in the oil price remains high.

Market based inflation expectations have declined significantly during 2014. This reflects that global fixed income and inflation swap markets are sensitive to changes in oil prices and the drop in the oil price at end-2014 and the beginning of 2015 pushed down the market pricing of future inflation. 

Danske Bank notes in a report on Wednesday:

• We see value in positioning for higher inflation especially after the oil price has stabilised and as positive base effects will support inflation in end-2015.
  
  
• The current market based inflation expectation is actually almost consistent with the oil price remaining unchanged at the current level during 2015 and 2016.
  
  
• Further out on the curve inflation is priced below 2% the next ten years, hence the current pricing suggests the ECB will undershoot its target until 2025.
  
  
• The attractiveness of now buying exposure for higher inflation follows as market based inflation expectations are mostly driven by changes in commodity prices. Related to this it is less important that there is downside risk to core inflation for a long time.
  
  
• Our forecast for inflation is above the forward rates derived from the break-even inflation curve in 2015, 2016 and 2017.