The oil price in euro is lower than a year ago – Who can expect a stronger inflation momentum? The energy contribution to the inflation rate will converge to 0 and inflation will converge to its core rate (circa 1%) The ECB is in a comfortable situation and will not change rapidly its strategy
The inflation rate was at 2% in February after 1.8% in January. It’s the highest record since January 2013. The core inflation is stable at 0.9%. It means that energy is the main driver for the higher inflation rate.
The first graph shows that the core inflation rate is stable since 2014 and the volatility of the inflation rate is associated with the oil price yearly change.
The oil price effect has started to diminish. The second graph shows the consistency between the yearly change in oil price (blue) and the energy contribution to the inflation rate (purple). We see that the oil price change has peaked in January and will follow the red line which shows the oil price yearly change when the oil price is at 55USD and the exchange rate at 1.06.(the last point is June 2017)
The oil price impact will be transitory and the energy contribution will start decreasing in April probably as there is persistence and delay between the oil price and contribution.
In other words, after the current peak, the inflation rate will converge to the core inflation rate (circa 1%).
This temporary effect of oil price on inflation is a strong incentive for the ECB to keep its monetary policy stance unchanged.
The Euro Area inflation rate jumped at 1.8% in January after 1.1% in December 2016.
The graph below shows the cumulated contributions to the inflation rate. It can be read in the following manner: the red line is the goods price contribution to the inflation rate; the blue line is the sum of the red line plus the services price contribution to the inflation rate; the green line is the sum of the blue line and of the food price contribution to the inflation rate. Alle these prices represent more than 90% of the Consumer Price Index. The green line is almost stable; its range is 0.6% – 0.85% since mid-2014. There is no surge in inflation through all these prices.
The last line, the purple one, is the sum of the green line and of the energy price contribution to the inflation rate. Continue reading →
The stabilization of the oil price around USD 50 implies that the contribution of the energy sector to the inflation rate converges currently to 0.
In October for the Euro Area, this contribution was only -0.09%, its highest number since June 2014. The profile is the same in the US.
The point is simple. The current oil price is comparable to the price seen one year ago. This wasn’t the case since mid-2014. Therefore the energy contribution to the inflation rate was systematically negative as the oil price was lower than a year before. As prices are currently comparable the contribution converges to 0 Continue reading →
The inflation rate for the Euro Area (flash estimate) was at +0.4% in September. It is the highest since October 2014. In August the inflation rate was at 0.2%. The core inflation rate was stable at 0.8%.
The explanation has to be found in the oil price profile. I explained that in a post in August (see here). Continue reading →
Currently, the most important graph is the price of oil.
Last week, the oil price was above its level of August 2015. The oil price has started to fall at mid-2014. Since this moment, the oil price was always below the level it had one year before. this has changed last week. It’s the first time since 2014 that we see such a crossing.
This means that the energy contribution to the inflation rate will rapidly tend to 0 and if the price remains close to 50 the contribution will become positive. Therefore the inflation will rapidly converge to the core inflation rate. It will still be below central banks’ target (2%) but it is an important step. Continue reading →
First graph – A lower oil price will drive inflation rates down
With Iran back on the oil market, the price dropped below 30 dollars for a barrel. This could have an important impact on the inflation rate and therefore on monetary policy strategies in Europe and in the US.
The graph shows, for the Euro Area, the energy contribution to the inflation rate. It also shows the one year change of oil price (Brent) in euro. The two curves have consistent profiles.
With an oil price at 50 and the EURUSD exchange rate at 1.07 (red line), the oil price change is consistent with an energy contribution that could be close to 0 on average in 2016. It was a good hypothesis to put the price at 50. In that case, the headline inflation rate was able to converge to the core inflation rate. It was a comfortable situation for central bankers.
If on average, the oil price is 35 USD and 1.07 (green line), the contribution could be close to -0.6%. In that case, the inflation rate would be circa 0%. With 30 USD and 1.07 it would be probably negative.
These simple calculus show that the oil price trajectory will be important in 2016 (close to 30 or below?) and that there is no guarantee that inflation rates could converge to 2% in a finite time. Continue reading →