Eurozone: Underlying price pressures remain subdued - RBS

Research Team at RBS, notes that the Eurozone’s headline inflation has crept up a little in recent months partly because the drag from falling energy prices has eased but underlying price pressures remain subdued and are expected to remain so in the period ahead.

Key Quotes

“The key reason for this concerns the large margins of spare capacity that exist in labour markets and product markets. A recent paper by the ECB’s Jarocinski and Lenza argues that the output gap was as large as -6% over 2014-2015. If this is the case, (and we do not expect notable improvements over 2016-2017), it will be increasingly challenging to lift inflation over the coming quarters not least if, as we expect, economic growth continue to slow. That wage pressures and market-based inflation expectations remain weak add weight to this argument. From a near-term cyclical perspective a waning influence from a weaker exchange rate should also help.”