Underlying inflation dynamics to remain subdued in the Euro area – Goldman Sachs

By FXStreet FXStreet (Delhi) – Research Team at Goldman Sachs, notes that in 2015, Euro area headline inflation was ‘tossed’ (owing to volatile commodities prices), but did not ‘sink’ into negative territory.

Key Quotes

“Instead, ‘core’ inflation (on measures excluding energy and food prices) rose – albeit at a very gradual pace – over the course of the year, reaching +1.0%yoy at end-2015. While still well below rates consistent with the ECB’s price stability objective, the stabilisation of core inflation has been widely seen as a reassurance that the risk of outright deflation has abated.

Euro depreciation offered temporary support to inflation

But the recent firming of Euro area core inflation reflects in part the depreciation of the Euro exchange rate since mid-2014. In most cases, currency depreciation provides a positive but temporary support to domestic core inflation. On that premise (and all else equal), core inflation may again drift lower as the transient Euro-driven support ebbs away: underlying price dynamics are weaker than current core measures suggest.

Breakdown suggest Euro effect important but not sole driver

We examine 255 price series accounting for more than 80% of the Euro core HICP basket. Our identification scheme suggests that the Euro’s depreciation has had a non-negligible impact in France …read more

Source:: FX Street