Euro inflation declined back to this cycle low of 0.5% y/y in May from 0.7% y/y in April. This was in line with our revised forecast but lower than we initially expected.
The decline followed as core inflation went down to 0.7%, which is the same rate as in March and historically low. The lower core inflation was mainly due to lower service price inflation, which went down to 1.1% y/y from 1.6% y/y. This is likely to primarily be a result of lower inflation on package tours (the timing of Easter). But inflation on non-energy industrial goods is also a bit lower at 0% from 0.1% y/y. This is likely to reflect a negative impact from the strong euro.
Food price inflation went down to 0.1% y/y from 0.7% y/y in April. Hence, the higher global food prices are still not affecting food consumer prices. We expect an impact from the increase in global food prices in Q4.
Energy price inflation was 0% y/y having been negative for four consecutive months. The monthly change was still negative at 0.1% m/m - hence, the increase is mainly a result of upward pressure from base effects.
Looking ahead, we expect inflation to remain around the current level until Q4, when we forecast an increase to around 0.9% y/y. This implies that we expect average inflation to be 0.7% in 2014. In 2015, our forecast is for inflation to gradually increase to 1.1% on average. This should reflect higher food price inflation as a result of the increase in global food prices. Moreover, the recovery should gain strength and unemployment should go lower, which would slowly put upward pressure on inflation.
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