Goldman: European Traded Inflation Shrugs Off Growth Worries

Goldman Sachs note that “the ECB has referred to traded inflation levels as a gauge of central bank credibility. And with 5y5y HICP trading close to 2.6%, it suggests upside risk to the ECB’s inflation target.”

• “We benchmark traded inflation on the distribution of long-term inflation forecasts as surveyed by the ECB, controlling for shifts in the macro backdrop. We find that the compensation for inflation risk embedded in HICP forwards is broadly fair, given the current skew of inflation forecasts, but that it has displayed little sensitivity to the weakening growth momentum.”
• “Further out on the curve, we argue that the decoupling between US and European traded inflation is hard to explain fully on fundamental grounds, and possibly reflects, in part, the limited availability of inflation-linked bonds in Europe. We see asymmetry to the downside in long-end HICP and also the long-end CPI-HICP spread.”