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Optimistic Inflation Appraisals See Core Past The Worst (2/4)


First we start with analysts who appear relatively more constructive on the inflation signal sent by May's data. These include those who see one or two more ECB rate hikes, in part dependent on their in-house inflation outlook, or whether they see upside risks offset by their expectation the the ECB will interpret the recent data favourably.

  • We start with Commerzbank who write that "underlying inflation has probably passed its peak". They note that after the significant decline in energy prices, there now also seems to be a correction of the high price level for food which will push inflation down further in the coming months, and that by this point companies should have passed on a large part of the energy price-related increase in production to consumers. They acknowledge that with wages rising strongly a new wave of costs will drive up prices for services in particular, but nevertheless the ECB is likely to take a favourable view of May's inflation data and will raise rates by 25bp for the last time in June.
  • UBS regarded May's inflation data as still consistent with further ECB hikes but also see signs of gradual improvement. The data showed signs of easing not just due to mechanical base effects but also broader core inflation improvements. These are welcome developments for the ECB but to end the hiking cycle it needs to see sustained improvement in the broader inflation environment (incl core, underlying , expectations, wage dynamics) so will hike 25bp in June and July, with gradual further improvement in the broader inflation environment over the summer which would allow for no further hikes.
  • Another who sees May's developments as relatively constructive is JPMorgan, who look for 25bp hikes in Jun and Jul, and noted that “after controlling for noise in the data, the move down in core remains significant". They highlight that May core was up 0.1% M/M (0.2% ex-German transport ticket) vs 0.5% in the prior 6 months (core goods +0.2% M/M, core services +0.1% or 0.3% ex-German transport ticket). Additionally, basket weight changes did not impact core significantly in May, and “the services price data ... in our view do not hint at a more significant passthrough from higher wages.”
  • In a similar place is Goldman who sees 2 more 25bp ECB hikes. They revised down their eurozone inflation forecasts on the back of May's numbers: they continue to expect a gradual cooling in sequential core goods pressures, but forecast sequential core services pressures to remain sticky. Core and headline inflation to be 3.6% Y/Y (vs 3.7%yoy previously) and 3.0% (vs 3.1% previously) respectively in December 2023.

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