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Eurozone: Inflation and German politics - Danske Bank

The focus in the Euro area will continue to be on German politics next week, explained analysts from Danske Bank. Regarding economic data, they forecast a rebound in euro area HICP inflation in November to 1.6% y/y, driven by a recovery in core inflation and higher energy prices.

Key Quotes: 

“In the euro area, the key release is the HICP figures for November, due on Thursday. Headline inflation decreased to 1.4% y/y in October down from 1.5% y/y. Core inflation also took a dip, reporting 0.9% y/y down from 1.1% y/y in September. Especially service price inflation played a major role in the decline, as volatile components such as package tours and services related to transport saw drops, while Italy registered a sharp decrease in education prices which also weighed on service price inflation. We do not see the October dip as the beginning of a declining trend, but instead expect core inflation to bounce back to 1.1% y/y in November. The combination of a rebound in core inflation and higher energy prices driven by the recent pickup in oil prices leaves us to project an increase in the headline measure to 1.6% y/y. Note that the German inflation figures are due for release on Wednesday.”

“German political developments will continue to be in focus this week after coalition talks for a ‘Jamaica’ coalition collapsed. After still ruling out another grand coalition with Angela Merkel’s CDU party on Monday, the SPD leadership is now signalling some willingness to negotiate over a Merkel-led minority government or even a grand coalition 2.0. Although the probability for new elections in 2018 has decreased in light of the SPD’s latest moves, we continue to see this as the most likely option, although the initiative now lies with the president.” 

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