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UniCredit Euro Inflation Update (May 2021)

  • Eurostat will publish its preliminary estimate of eurozone May HICP next Monday. We expect headline inflation to have accelerated further, to 2.0% yoy from 1.6%, with core inflation increasing by 0.3pp to 1.0% yoy. The last time the inflation rate was at, or above, 2% was in late 2018.
  • Energy prices are likely to have been lifted by another large base effect and we expect them to add 0.2-0.3pp to the headline inflation rate. Leading indicators for food inflation are trending higher, although this month the contribution of food prices to the acceleration in headline inflation is likely to have been contained (0.1pp).
  • Core inflation probably moved higher, reflecting a combination of factors: a technical adjustment in apparel prices, the impact of the gradual reopening of the economy on the price of some services, the possibility that rising pipeline pressure in manufacturing might have started to (moderately) spill over to goods inflation, and the unwinding of the Easter effect.
  • On page 3, we provide our usual scenario analysis for eurozone headline inflation under different trajectories for oil prices and EUR-USD. The first scenario assumes that these two variables will remain unchanged at current levels over the forecast horizon; the second assumes that they will move in line with current market expectations.

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