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Eurozone inflation continues downward grind - Goldman Sachs

FXStreet (Łódź) - Pierre Vernet, economist at Goldman Sachs observes that apart from the fact that Eurozone inflation has been low, dropping further to 0.3% y/y in September, it is worth noting that it's increasingly persistent.

Key quotes

"We look at the statistical properties of price indices in the Euro area and find that the persistence of inflation has risen since the financial crisis, as new inflation outturns have shown a greater tendency to print closer to their recent trajectory. This rise in the degree of inflation persistence appears to be a common pattern across most Euro area countries and across most sectors (including in non-core categories)."

"Standard measures of inflation – such as the headline HICP – do not account for variations in the degree of persistence across subcomponents.The logic of observing core inflation is that, by stripping out the most volatile price components entirely, one can provide a better gauge of underlying inflation pressures than headline inflation."

"However, by weighting individual indices according to their degree of persistence, it is possible to outperform measures of core inflation in predicting the medium-term inflation trajectory. We develop ‘persistence-weighted’ price indices for the Euro area."

"Understanding the degree of persistence in prices and what it implies for the inflation outlook is key in evaluating the prospects for monetary policy. The rise in Euro area inflation persistence since the crisis implies that the risk of outright and generalised falls in price indices is still remote, since we are still at positive levels."

"Yet, the increase in persistence also makes re-attaining the ECB’s price stability objective more distant once – as has now happened – headline drifts lower. Moreover, to the extent that persistently low inflation feeds into a decline in longer-term inflation expectations, inflation persistence can also make achieving price stability more challenging."

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