Thus, the two most important domestic influencing factors for core inflation point
to a significant pick-up. We estimate that both the output gap and wage rises will
have an impact on core inflation with a lag of four quarters, with the coefficients
being quite low, at 0.15 for wages and 0.1 for the output gap. However,
declining import price growth is likely to slow down the trend in core inflation.
While import prices, particularly for crude oil, but also for food, feed through
quite rapidly to the volatile energy component of headline inflation, they also
affect the core rate, if with a more marked lag. The considerable slowdown in
import price inflation during 2017, from 7.4% in February to 1.1% by the end of
the year, looks set to dampen core inflation in 2018. Moreover, we expect the
euro to appreciate steadily versus the US dollar, to USD/EUR 1.35 by the end of
2019. This should moderate import price growth, too, particularly since oil prices
look set to decline slightly again. While commodity prices excluding energy have
risen slightly in euro terms in the last few months, they will probably stabilise on
average during the year, despite dynamic global growth (OECD, World Bank).
Core inflation therefore looks set to accelerate to almost 1 3⁄4% on average in
2018 and to nearly 2% in 2019. Both forecasts are considerably above the
average rate of the past 20 years (1.1%). A rate of 2% in 2019 would be
equivalent to that of 2007, which was the strongest in the past two decades.
EU Forecast
euf:ba1.8i:142/nws-01