Inflation Trends Remain Weak for UK, Eurozone and US Despite Oil Price Rally

Inflation Trends Remain Weak for UK, Eurozone and US Despite Oil Price Rally

10 May 2016, 14:35
Roberto Jacobs

Inflation Trends Remain Weak for UK, Eurozone and US Despite Oil Price Rally

The rally in global oil prices that had given some positive news for global inflation trends in early 2016 started again in April, with Brent crude reaching about USD 45 per barrel. The upward movement of oil prices continues to contend with the Euroarea’s subdued inflation dynamic.

The European Central Bank aggressively eased the monetary policy during its March meeting, but the strength of euro continues to be a drag on core inflation, excluding energy and food. There is probability of the ECB to further ease policy. Eurozone’s April’s flash inflation estimate decelerated to 0.7% y/y and is expected to struggle to accelerate significantly. Hence, overall inflation in euro area is likely to be in negative territory in the near term, according to Lloyds Bank.

However, stronger energy prices and the possibility of additional increases in the medium term should ultimately help in acceleration of inflation globally. Meanwhile, the headline inflation rates in the US also remain impacted due to oil prices. According to March’s latest inflation data, CPI inflation decelerated to 1% y/y from January’s 1.4% y/y. Stripping food and energy effects, the core inflation continues to be significantly stronger than that of euro area.

“That stronger relative performance of underlying inflation may help explain the recent readings of market-based inflation expectations, which, while weak for both the US and Eurozone, have continued to creep higher for the former”, added Lloyds Bank. Meanwhile, UK’s headline CPI inflation is also in the process of a rebound. In March, CPI inflation for the UK reached 0.5% y/y. Even if the recent rally in the oil prices is likely to feed through to forecourt fuel prices, reductions in retail gas tariffs will somewhat counter that.

The noticeable decline of the sterling from 2015-end is expected to provide certain momentum to core inflation. In March, UK’s core inflation accelerated to 1.5% with the help of the surge in airfares due to early Easter holidays. However, this effect is likely to unwind. Meanwhile trends in cost the UK economy continues to disappoint. The underlying inflation dynamics for the UK is expected to be weak in spite of the pick-up in commodity prices and a weaker exchange rate.

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