Eurozone Inflation: Upside risks from oil prices and rising wage pressures – Danske Bank

Looking at different factors such as monetary and fiscal policy, the oil price and exchange rate impact as well as evidence on rising wage growth, analysts at Danske Bank conclude that the balance of risks to their Eurozone’s inflation forecast (1.4% and 1.3% in 2018 and 2019, respectively) and market pricing lies clearly on the upside, particularly in 2019.

Key Quotes

“We expect the impact of monetary and fiscal policy on euro area inflation in 2018 and 2019 to be balanced: while euro area fiscal policy might become moderately more expansionary in 2019, we believe gradual ECB monetary policy normalisation will increasingly become a disinflationary factor.”

“We see upside risks to our inflation forecast from the direct and indirect effects of higher oil price rises but we believe the stronger euro will increasingly act as a mitigating factor from H2 18 onwards.”

“In light of the lack of a clear upward trend in super core inflation, we remain sceptical about a strong pickup in core inflation in the near term. This said, there are clear upside risks to core inflation, primarily in 2019, stemming from the strong growth momentum and early signs of rising wage pressures.”