Eurozone inflation returns to dispel deflation concerns

More importantly, the core rate of inflation (excluding food, alcohol, tobacco and energy) increased from 0.6% to 0.9% – supporting our view that deflationary pressures are not a major concern for the monetary union. Indeed, as we head into the second half of the year, we expect to see headline inflation head higher, and by early next year, catch up with the core rate, especially as the recent fall in global energy prices fall out of the annual comparison. As prices have fallen over the past couple of quarters, households have used the extra real disposable income to purchase more goods and services. They did not save those gains in anticipation of further deflation – an important distinction from the Japanese experience.

For the European Central Bank (ECB), the faster than expected rise in inflation is unlikely to change its outlook or path of monetary stimulus. The ECB always had a more optimistic forecast than the consensus, and so will not be overly surprised that growth and inflation are improving. We expect the ECB to continue its QE programme until September 2016.

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