Julius Baer | Eurozone inflation is approaching its highest level since late 2013 with a December reading on Wednesday at 1.1%. A glance at the core inflation rate, which excludes the volatile food and energy component, delivers the explanation of the recent surge. Energy is today about 60% more expensive than a year ago.
The energy contribution explains the full rise in inflation rate. The core rate is expected to remain at 0.8%, which is the level that prevailed in the previous five monthly readings. The impact on bonds should be slightly negative given the market’s appetite for reflationary stories and the depressed levels of yields due to the ECB asset purchasing programme. Higher inflation and a loose monetary policy are also negative for the euro and we see further downside from here with a 3-month target of 1.03 EUR/USD or lower.
Eurozone inflation is taking off due to powerful base effects in energy prices. The market’s appetite for reflation stories could drive eurozone bond yields higher and the euro lower as a result of the higher inflation figures.
