- Inflation is still too low in the eurozone
- This is what matters most for the ECB
Core inflation, which excludes volatile items such as energy, is currently the most pertinent indicator for measuring price stability in the eurozone. It slipped to 0.7% y/y in March, down 0.2 points from the previous month. Although this decline is essentially due to seasonal effects, which are temporary, the observation is nonetheless the same: inflationary pressures are weak or nonexistent. The cumulative lag in production since 2008 is still important, resulting in persistently high unemployment, despite the recent decline.
Against this backdrop, we expect the European Central Bank (ECB) will remain extremely cautious. Without denying that the structural heterogeneity of EMU member countries poses a real communications challenge for the central bank, we continue to expect an extremely gradual exit from quantitative easing (QE) starting in January 2018. The ECB will probably describe its exit strategy in greater detail next September. In the meantime, economic statistics will confirm – or not – the optimism of recent surveys.
by Thibault MERCIER