Eurozone: Core inflation could end 2018 lower amid crude oil prices  - Natixis

Analysts at Natixis point out that second-round effects related to oil prices should not be overlooked in the Eurozone. 

Key Quotes: 

“When forecasting euro-zone inflation, it is important to not forget that core inflation depends not only on unit labour costs excluding energy price effects but also on energy (oil) prices via their “second-round effects”.

“A 10% increase in energy prices in the euro zone leads to: - A 1 percentage point increase in headline inflation;- Given the estimated price indexation of wages in the euro zone (0.26) in the recent period, a 0.26 percentage point increase in per capita wages; - A 0.7 percentage point increase in core inflation, due to: - The reaction of wages; - The direct effect of energy prices on core inflation.”

“If, at the end of 2018, energy prices have been stable year-on-year, given the aboveestimated second-round effects of energy prices on core inflation (via wages and directly) and given trend growth in unit labour costs (0.9% per year), core inflation should be 0.7% yearon-year, which is a very long way from the ECB’s target.”