Euroland inflation rate: oil price, the black sheep

The Euroland inflation rate has made a surprisingly sharp jump upwards. The annual rate has accelerated within the space of only one month from +1.2 percent to +1.9 percent. At first glance it thus looks to be in line with the ECB corridor of inflation close to but below 2 percent. The price drivers in May can essentially be limited to two components: The end of the so-called Easter effect and the noteworthy rise in the price of oil.

Since the Easter holidays were in March this year, prices above all for tourism-related services surged that month. In April, the opposite effect kicked in, and prices fell disproportionately compared with the prior-year month. These distortions (the Easter effect) have largely evaporated in May and have led to price pressure for services “normalising” again. For this reason, the core rate, meaning the inflation rate excluding energy, food and luxury goods, recorded a visible increase from +0.7 percent the previous month to +1.1 percent.

The increase in energy prices played at least just as prominent a part. The annual rate leaped from +2.6 to a massive +6.1 percent. Given the strong rise in the oil price of almost 50 percent on the prior-year month, an appreciable rise in the price of fuel and other energy sources was expected.

Whether the ECB really likes the inflationary trend? After all, the inflation target has been optimally met, at least in statistical terms. However, the ECB with its expansionary monetary policy is focused more on economic developments picking up. This trend is best reflected by the core rate, which at present most certainly does not indicate a need for concern about inflation.

The higher oil price could now in fact take the already low wind out of the sails of the core rate: The oil price strips households of purchasing power to a certain extent. Because a larger part of disposable income is used for energy goods, meaning demand for other goods and services falls. If the oil price remains at a higher level, this could slightly boost disinflationary trends and also weaken the economic engine. It is a truly bad scenario in light of the fact that economic sentiment has dimmed in recent months anyway.

The oil price is currently somewhat being stoked by numerous geopolitical conflicts. We expect that in the second half of the year, these risks will tend to abate. The exaggeration in the oil price will as a result lessen again somewhat. In other words, the current energy-driven inflation rate should ease in the further course of the year. On average for the year, we think Euroland will see a comparatively moderate inflationary trend, with a rise of around 1 ½ percent on the year.


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