German HICP inflation increased to 0.4% y/y in January, from 0.2% y/y in December, in line with our estimate and consensus. German CPI was a bit higher than estimated, as it increased to 0.5% y/y, from 0.3% y/y (consensus 0.4% y/y).
Looking at the details for CPI inflation, energy price inflation had a smaller negative impact, as it was -5.8% y/y in January compared with -6.5% y/y in December. The increase followed despite energy prices falling 2.5% m/m in January in line with the sharp oil price decline. Food price inflation continued lower and was 0.9% y/y in January, down from 1.4% y/y in December. Overall, this points to an increase in core inflation, which should have been driven by non-energy industrial goods prices, as service price inflation was unchanged at 1.2% y/y.
We expect the euro HICP inflation figure, due for release tomorrow at 11:00 CET, to increase to 0.5% y/y, from 0.2% (consensus 0.4%). At the very short end, the inflation market is pricing HICP inflation excluding tobacco at 0.2% in January and throughout 2016 inflation is priced too pessimistically, in our view (see more below). Notably, we expect core inflation to increase to 1.1% y/y in January, from 0.9% y/y in December (consensus 0.9%).
The January inflation print will be based on updated item weights and given the decline in energy prices in 2015, the weight of energy prices should be lowered. This said, in our opinion, putting a smaller weight on the drag from energy prices should not result in significantly higher inflation.
Note that the French and Spanish HICP inflation figures are due for release tomorrow, ahead of the aggregate print for the euro area. Consensus is that the French figure will increase by 0.1pp to 0.4% y/y, while it expects the Spanish figure to remain unchanged at -0.1% y/y. Our forecasts are 0.1pp above consensus for both the French and Spanish figures.
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