Inflation outlook
Euro inflation declined to a new cycle low of 0.5% in March. This is the lowest rate of inflation in more than four years and far below the ECB’s 2% target. In the coming months, positive base effects are set to put slight upward pressure on inflation, but we expect it to stay below 1% until mid-2015. We continue to forecast average inflation at 0.7% in 2014, increasing slightly to 1.0% in 2015 (see more details on page two).
The lower inflation is not contradicting stronger growth in the euro area, in our view. Lower commodity prices have increased purchasing power and although there was a decline in wage growth in Q4 13, real wage growth was above 0.5% in H2 13. This is a clear improvement from its previous decline in 2011-12.
Deflation index
In Danske Bank’s Euro Area Deflation Index below, all countries are placed at or below zero and the overall euro area has moved down to -6 from -5 in our index. Germany is now negative in our index and the scores of France and the Netherlands are around those of the periphery countries. Headline inflation is below 1.5% in all countries.
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