The oil price has dropped 7% since last Thursday and is still trading below USD60/bbl, which is the lowest level since April. Related to this, market-based inflation expectations are lower reflecting a risk of a prolonged period of very low inflation due to the decline in the oil price. The 5Y5Y break-even inflation swap has declined to around 1.8% after having been on an upward trend since the beginning of this year. However, the current level of the oil price does not change our expectation of higher euro inflation later this year .
At the end of this year, the drag from energy price inflation will fade despite the latest decline in the oil price. This follows as the oil price measured in EUR is currently higher than the price at the beginning of the year, implying the yearly change will increase above 0.0% if the oil price stays at the current level. Assuming the oil price is unchanged around the current level, the contribution from energy price inflation will go from -0.6pp in September to +0.4pp in January next year only due to base effects .
To Read the Entire Report Please Click on the pdf File Below