The ECB in December will most likely once again lower its inflation projection, but unlike the update in September, the lower forecast should mainly be driven by a lower core inflation projection.
A lower core inflation forecast should be one of the arguments for the ECB stepping up its monetary accommodation in particular as the ECB's lower core inflation outlook should mainly be a result of the strengthening of the effective euro since spring.
Non-energy industrial goods price inflation which is around 40% of core inflation was supported by the weaker effective euro, but given the euro appreciation the trend higher looks fragile. This also reflects the persistent low oil price.
The ECB could also lower its core inflation forecast owing to subdued wage pressure. In our view, the ECB's core inflation forecast has long been too optimistic and inconsistent with the output gap in the euro area.
The experience from the US and the UK is that wage growth remains low until the unemployment rate reaches NAIRU, which neither we, nor the ECB, expect to happen during 2016.
Regarding the energy price inflation forecast the ECB should lower it marginally, as the oil price path implied by futures markets is slightly lower compared with the level in September.
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