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EMU CommentInflation back in line with the ECB's target

  1. Inflation surprised on the upside, as hinted by recent price data
  2. Inflation surging above the ECB's forecast
  3. Unemployment gap is now closed
Inflation surprised on the upside, as hinted by recent price data
The flash annual HICP inflation increased significantly in May to 1.9 percent from the previously subdued 1.2 percent. The increase was less of a surprise given the upbeat consumer price data released yesterday from Germany and Spain (and to a lesser extent from France this morning). All of the three core countries now have annual inflation rates of 2 percent or above. On the other hand, Italy still has lower inflation, at 1.1 percent in May, although it increased from 0.6 percent previously (HICP). The rise in inflation mainly was due to the annual base effect from lower prices a year ago, but it was topped up by higher energy prices. Annual core HICP inflation thus rose less markedly to 1.1 percent from the previous 0.7 percent.
Inflation surging above the ECB's forecast
The increase brings inflation back to the highest level in 13 months after having left the previous months of Easter disturbances behind. This (so far) confirms our forecast of inflation being on a rising path, although it will probably be gradual when looking through the volatility of the single-month observations. Moreover, this implies that the ECB’s projection of the inflation path from March will prove to be too low (first graph). Even though inflation is now compatible with the ECB’s aim of inflation just below 2 percent, it will probably take more elevated observations to convince the ECB to state that its aim for inflation is within reach for the foreseeable future, particularly given the recent Italy-related turmoil. We continue to expect that a tightening labour market will keep inflation on a gradual rising path; in addition, the recent weakening of the EUR should lessen (and even reverse) the disinflationary effect through import prices (second graph).
Unemployment gap is now closed
With regard to the labour market, there was another decline in the eurozone's unemployment in April, with the unemployment rate dropping to 8.5 percent (previously: upwardly revised to 8.6 percent), marking a low since 2008. This should more or less finally close the unemployment gap, which was estimated at close to 8.5 (in 2017) by the OECD. Hence, further declines in unemployment should pave the way for more broad-based pressure on wages, which could be added to the already very high reported restraints from lack of qualified labour (third graph).


Source: Macrobond


Source: Macrobond


Source: Macrobond


Rasmus Gudum-Sessingø

Senior Economist



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