Eurozone flash CPI: Upside risks to the core, downside risks down the line - RBS

Research Team at RBS, suggests that the Eurozone flash inflation release is expected to show that headline CPI at -0.1% y/y, in line with Bloomberg consensus, but they believe there are upside risks at the core level.

Key Quotes

“Specifically, we forecast core inflation to bounce up to 0.8% y/y in May, which is slightly above current market expectations of 0.7%. This is based on unwinding of the effects of unusually weak (volatile) package holiday prices in April, which alone should add about 0.1pp to the headline and 0.15pp to the core inflation rate.

Meanwhile, we expect price growth in other components to remain subdued. In our view, sluggish non-energy commodity prices and the stronger euro is likely to depress goods price inflation in the months ahead. Energy price growth will likely stay deep in the negative over Q2-Q3, until base effects fade in Q4. We expect services price inflation to remain under wraps as wage costs struggle to recover and inflation expectations stay weak. In this context, we believe inflation is likely to disappoint expectations in the period ahead, which, in turn, underpins our call for further ECB action this year.”