Inflation rate in the euro zone: Exchange rate beats the oil price

In January, the inflation rate in the euro zone declined slightly, falling from +1.4 percent in December to the current level of +1.3 percent. At first sight this might seem surprising, given the meanwhile sizeable increase in the oil price compared with the previous year. But the simultaneous appreciation of the euro against the US dollar has had a dampening effect on the oil price increase in euro terms.

The effects of the exchange rate at its current high level can therefore be clearly seen in consumer price developments. Imports from outside the euro zone are becoming generally cheaper. But the exchange rate is unlikely to rise further for the time being. We therefore expect the inflation rate to creep up again slightly in the months ahead, but with no major upward movements likely.

In January, the price of a barrel of Brent crude, the most important grade for Europe, traded around 25 percent above the prior year level in average terms, at just under 69 US dollars. The exchange rate of the euro against the US dollar stood at around 1.22 dollar per euro, compared with 1.06 dollar per euro in January 2017. This appreciation of around 15 percent has therefore had a dampening effect on price increases, as can be seen above all in the energy -component of the European consumers’ basket. The price of energy has risen compared with the same month of the previous year by only 2.1 percent. In November and December, by contrast, price increases of 4.7 and 2.9 percent were recorded.

On the other hand, the inflation rates for other goods and services showed little movement. The price uptrend decelerated for food, beverage and tobacco products, increased slightly for industrial goods and remained unchanged for services. The core rate excluding the volatile components energy and food climbed slightly from 0.9 to 1.0 percent.

In the large member states of EMU which have also delivered a preliminary estimate for January, the inflation rate also headed downwards, in Spain from 1.2 to 0.7 percent and in Germany from 1.6 to 1.4 percent. Only the French inflation rate recorded a rise, from 1.2 to 1.5 percent; here a tax increase on diesel and petrol prevented energy prices from weakening noticeably.

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