The inflation slows down

4th July 2017

Daniel Pfund, Senior Financial Analyst, Fund Manager

The main objective of the European Central Bank (ECB) is to maintain price stability. For the ECB, this objective concretely represents rising prices of close to, but below, 2% per year.

What about the economic reality? The figures provided by Eurostat are headline inflation, as well as other levels of inflation, including core inflation, which excludes cost of energy, food, alcohol and tobacco.

The headline inflation is much more volatile, especially due to the petrol price (which represents 9.5% of the index). It is therefore the core inflation, which needs to be monitored, as ECB can take influence on this one. It is also the core inflation, which gives a better picture of the health of the economy.

In these conditions, it looks likely that the ECB has not yet achieved its objectives. It would therefore be premature for it to stop its monetary stimulus plans. Therefore, the buyback program of bonds (governmental, but also corporate) should continue at least to the end of 2017. This should maintain interest rates low, to the contrary of our expectations from the beginning of the year.