In Danske Bank's Euro Area Deflation Index, all countries have a score lower than zero. The euro area score has declined to -6, although inflation was unchanged in June. The decline mainly came as nominal wage growth declined to 1.3% in Q1.
Euro inflation remained very low at 0.5% in June and is still far below the ECB's target. In response, the ECB eased monetary policy with a package of measures in June. We believe the measures will gradually support inflation but it will take some time (see ECB Research: Implications of the ECB easing measures, 6 June, and ECB Research: Draghi reveals favourable TLTRO details, 4 July).
We expect inflation to stay around current levels in Q3 but we see downside risk to our July forecast. Later this year, we forecast an increase to 0.9%, partly as higher global food prices are set to increase food consumer prices. When the impact of the ECB's policy kicks in and the recovery gains momentum higher wage growth should support inflation. Overall, we expect inflation to be 0.7% in 2014 increasing to 1.1% in 2015.
The low inflation is not contradicting stronger growth in the euro area. Lower commodity prices have increased purchasing power and real wage growth is positive. This is a clear improvement from the declines in real wages in 2011-12. However, the negative impact of the exchange rate on inflation also drags down GDP growth.
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