Moderate increase in EMU inflation rate – but much more than a one percent increase is unlikely next year

The preliminary estimate for the inflation rate in EMU for November has put the year-on-year increase in consumer prices at +0.6 percent. Once again this is a little bit more than in the previous month, and it is also the sixth month in succession in which the inflation rate has been positive. As expected, the higher inflation rate can be primarily attributed to price developments in the energy area. European consumers only had to pay -1.1 percent less for energy than in the previous year. This decelerating effect, that is largely due to the development of the crude oil price in the last two and a half years, is gradually easing up. At its peak, the price contraction for energy this year stood at -8.7 percent.

However, as in the previous months the uptrend in prices of the other components in the basket of goods remained moderate in November. Prices of food, drink and tobacco rose by an annualised +0.7 percent, industrial goods by +0.3 percent and services by +1.1 percent. The core rate excluding energy and food therefore also remained unchanged at +0.8 percent.

This means that, for the first time, consumer price development in all of the four big member states has now been positive. The inflation rates calculated in accordance with European regulations based on the Harmonized Index of Consumer Prices (HICP) amounted to +0.7 percent in the case of both Germany and France compared with the same month of the previous year, to +0.5 percent in Spain and to +0.1 percent in Italy.

How is European inflation now likely to develop? After the inflation-dampening effects have wound down, consumer spending on energy is likely to increase in the months ahead, but only very moderately. Starting out from its current level, we expect the oil price to increase next year to as much as 56 US dollar in the fourth quarter 2017, with the extraction restrictions being proposed by the OPEC countries likely to push up prices. But extraction capacities already existing in other countries, such as the USA or Russia, can be expected to counter a strong increase. However, as there are only very limited signs of increasing prices in the other areas of the basket of goods – despite the strong doses being administered by the ECB’s asset purchasing programme – the inflation rate in EMU will only rise to just over one percent in 2017. This should finally put an end to the deflation discussion, but we are still a long way from a ’normal‘ inflation development not to mention the ECB’s actual inflation target.


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