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Eurozone Inflation: Forecast Revision
• The past few months have seen an
acceleration in the upward dynamics of oil and
other commodity prices.
Chart 1: Brent 1-Mth Futures & BNPP Forecast
• In the eurozone, these trends have been
compounded by the vibrancy of the German
recovery.
• We revise up our profile for inflation in the
eurozone in response to these developments.
• We expect headline inflation to average 2.2%
in 2011 (from 1.8%) and 1.6% in 2012 (from 1.3%)
• Core inflation, however, is still expected to
remain subdued, averaging 0.9% (from 0.7%)
and 1.1% (from 0.5%), respectively.
Source: Reuters EcoWin Pro
Chart 2: GSCI Agriculture Spot Return Index
Commodity shock
The past few months have seen an acceleration in
the upward dynamics of oil and other commodity
prices, in particular soft commodities. A number of
idiosyncratic factors have contributed to these trends
including adverse weather conditions, supply
disruptions and protectionist threats. But the shock
was primarily due to fundamental factors including
slack monetary policy and a closing output gap at the
global level 1 . The risks to global inflation are high.
In the eurozone, these trends have been
compounded by the greater-than-expected vibrancy
in the economic recovery in Germany and higher
taxes in a number of countries which are undergoing
a significant fiscal adjustment.
Revising our food, energy profiles…
Oil and food prices have rallied well beyond our
forecast. At the time of the last global in December,
BNPP Commodity Derivatives forecast that Brent oil
would reach around USD86/Bbl at the end of 2010,
before correcting to an average of around USD80/Bbl
in Q1. While a correction in Q1 is still the central
scenario, Brent oil prices have also risen
exceptionally strongly relative to WTI. As a result, our
Q1 forecast has been raised by around USD5/Bbl 2 .
For the eurozone, this USD5/Bbl revision adds
around 0.1pp to average inflation in 2011.
1 For more on this see “Global Inflation: Ready To
Takeoff?” in this edition of the Market Mover
2 For more information, see “Oil Update: Brent Premium
The New Norm” in this edition of Market Mover.
Source: Reuters EcoWin Pro
Source: Reuters EcoWin Pro
Chart 3: GSCI & CPI Food
The rally in soft commodity prices has also gone
further than we expected. Prices have already risen
above the peaks of 2008 (Chart 2) – evident in the
GSCI agricultural spot index, for example. In
December, we had expected a correction back to the
Eoin O’Callaghan 20 January 2011
Market Mover
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