It’s time for Europe to ‘fasten its seatbelts’ when it comes to inflation, as prices on the continent are finally going to rise in the coming months, according to economists at HSBC, led by Fabio Balboni.
In HSBC’s latest Eurozone inflation briefing — entitled “Fasten your seatbelts (but don’t get too excited)” — Balboni and his team argue that after a long period where inflation has been subdued, the impact of energy prices falling less than in recent months is going to push up core inflation on the continent.
Inflation will pass above 1% for the first time in more than three years in 2017, HSBC forecasts, with Balboni noting: “From September, inflation should start to move higher in a more decisive fashion, as the base effect from energy kicks in, taking inflation above 1% y-o-y in the first quarter of next year. But that’s all in terms of good news.”
Here’s the bank’s chart, showing the expected surge in inflation:
While Balboni and his team argue that Europe is finally set to get some inflation, we’re not going to hit the European Central Bank’s target of “close to, but below” 2%, thanks to subdued food price growth in the medium term, and a slump in industrial goods prices. Here’s HSBC:
“As we expected, some of the food price surprise in July is proving to be temporary, and we see more moderation in the coming months, even if the hot summer might have caused some disruptions in supply. The fall in industrial goods suggests that the euro depreciation has failed to generate any meaningful import inflation, at least so far.”
That, HSBC argues, will force the European Central Bank into more policy action, extending quantitative easing beyond its current horizon of March 2017. ECB president Mario Draghi batted away questions about such an extension of QE at the ECB’s meeting last week. Here’s more from Balboni:
“Mr Draghi keeps reminding us that we need to exercise some patience in waiting for better economic activity to translate into stronger inflation, but the fact that core and services inflation is not improving with the economic recovery heightens our concern that inflation expectations are becoming dislodged.
“We still think therefore that the ECB will have no choice but to extend QE in one of the upcoming meetings in 2016. But they are also — by their own admission — increasingly aware that they are running out of tools to affect the real economy, and they will be hoping that governments will also do their part.”
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