European Economic Perspectives "Eurozone: Inflation likely to peak at 3...."

Research evidence excerpt

European Economic Perspectives "Eurozone: Inflation likely to peak at 3...."

ne-offs) suggests that wage growth eased slightly since the start of the year,

to 3% y/y in March and April, down from 3.3% in January (Fig. 25).

Outlook for May: Headline and core +0.2pp to 3.2% and 2.4%, respectively

We forecast headline inflation to rise again in May +0.2pp to 3.2% y/y, which we expect

to be the peak. In contrast to March and April, when energy prices showed big %m/m

increases,we expect fuel prices to decline slightly in May (-0.7% m/m), largely due to a

temporary fuel tax cut in Germany. Despite the likely monthly decline, annual energy

inflation should rise further +0.6pp to 11.4% y/y, contributing to an increase in headline

inflation. However, the main driver behind the increase in headline is likely to be core

inflation, which we expect to rise 0.2pp to 2.4% y/y, solely driven by a 0.3pp increase in

services inflation to 3.3% y/y amid the reversal of the dampening effect of earlier timing

of Easter. Importantly, we expect services inflation to ease again in June to 3%, the level

where we foresee services inflation hovering until the end of the year. Goods inflation is

likely to remain unchanged at 0.8% y/y. Outside of core, we project food inflation to

ease 0.1pp to 2.3% y/y. At the country level, we expect inflation in Germany to remain

stable at 2.9%, thanks to the temporary fuel tax cut (currently in place until the end of

June), which we think will subtract c.20bp from German headline inflation. Similarly, we

expect Spanish inflation to remain unchanged at 3.5% y/y, helped by the unwinding of

the strength in clothing prices in April. Elsewhere across the large Eurozone countries,

we expect higher inflation rates. Specifically, we forecast inflation to rise 0.3pp to