Eurozone: Could core inflation return to 2%? - Natixis

Patrick Artus, Research Analyst at Natixis, suggests that it is very difficult for the core inflation in Eurozone to rise above the 2% mark.

Key Quotes

“Three mechanisms may make it difficult for core inflation to return to 2% in the euro zone:

• The weakness of the Phillips curve effect (the effect of the unemployment rate on wage growth) in the contemporary period;
• The appreciation of the euro’s exchange rate, which is normal given the United States’ external deficit, the euro zone’s external surplus, the decline in corporate profitability in the United States and its increase in the euro zone, and the acceleration in growth in the euro zone and its slowdown in the United States;
• The possibility that, like in the United States, increases in labour costs due to the fall in the unemployment rate may only very partially be passed on to higher prices set by companies. It is too soon to know whether such weak pricing power among companies - which is clear to see in the United States - will be present in the euro zone also.”

“If the weakness of the Phillips curve effect and the appreciation of the euro’s exchange rate keep core inflation in the euro zone below 2% even once unemployment has returned to the level of structural unemployment, then there will need to be a debate on the suitability of an inflation-targeting monetary policy.”