As expected inflation rebounded in April. According to Eurostat’s flash estimate it came at 0.7%, up from the y/y rate 0.5% recorded in March. Inflation, however, came in the low side of expectations as the Consensus was for a rebound to 0.8%.
■ The early timing of Easter last year created, as we know, some distortion, mainly in the services items which prices are most dependent on holidays.. Prices of components such as, “Restaurant & Hotels”, “Recreation & Culture”, “Package Holidays” and “Passenger transport by air” which increases were subdued in March 2014, probably sharply rebounded in April. At this stage (flash estimates), however, Eurostat does not provide any in depth analysis of the components. We just know the macro-aggregate. According to these figures, services inflation was 1.6% in April, up from 1.1% in March. By contrast, Non-energy industrial goods (NEIG) inflation, which with services inflation form core inflation, eased to 0.1%, from 0.2% in March. NEIG is highly sensitive to external forces, such as import prices and its determinants. Clearly the appreciation of the euro has put on a downward trend import prices and eventually NEIG. Combining tougher NEIG and Services, core inflation was 1% in April, matching thus its February reading.
■ How the ECB will react to these figures? Admittedly external forces such as the exchange rate and price of commodities are weighing on the inflation dynamics as mirrored by the fall of energy inflation and the weak reading of NEIG. By contrast, the most domestically oriented services inflation has rebounded, but its level remains weak. The Council, therefore, probably will wait to get the inflation figures for May, as the seasonal distortion will have disappeared. Yet, according to our projections, inflation will remain at alarmingly low levels over the forecast horizon and, as stressed by the Council, there are several risks associated with low levels of inflation which deserve to be countered by actions from the monetary authority.
BY Clemente DE LUCIA
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