Market Economics | Interest Rate Strategy - BNP PARIBAS ...

Global Inflation Watch
April Inflation: Easter Effect Unwinding
The eurozone flash estimate for April printed 1.5%
y/y, up 0.1pp on the month and the highest rate since
December 2008.
We will have to wait until mid-May to get the
breakdown, but we expect it to reveal that the rise in
inflation over the month was purely driven by food
and energy inflation. Energy price base effects are
now past, but a rise in oil prices over the month to
above USD 85/bbl should have pushed up energy
inflation. In addition, food price base effects are only
now really kicking in and point to a rise in food
inflation through the rest of the spring and the
summer.
In contrast, core inflation should have declined
sharply in April after rising in March, as the timing of
Easter continued to play havoc with the data. Nearly
all the strength in core in March was explained by
just two components – package holiday and hotel
prices. Because Easter fell in early April this year, we
believe that some of the traditional Easter strength
you typically see in these components bled into the
March data. As a result, this should have unwound in
April, pushing core back down to a new record low of
0.7% y/y. These dynamics are consistent with what
we saw in the weak preliminary German data, which
suggested that core inflation there fell by 0.7pp in
April to reach 0.2% y/y.
Easter distortions will finally work their way out in
May, when core inflation is likely to increase again
but finish at a lower level than in February, confirming
that the trend in core inflation remains downwards.
We will get more insight into the dynamics for April in
the coming week with data for France, Spain, Italy
and Germany. The French data is the most important
release – we have already had preliminary data for
the others. We expect French CPI inflation to have
ticked higher in April by 0.1pp to reach 1.7%, its
highest level since November 2008. The move
should be entirely due to energy – following a near
10% hike in the regulated price of natural gas. In
contrast, core inflation should have eased, even
though the French data are typically not as affected
by Easter seasonality as the German numbers.
Service price inflation should prove the driver,
pushed lower by declining wage costs.
Chart 1: Package Holiday Prices
(Spain and Germany)
Source: Reuters EcoWin Pro, BNP Paribas
Chart 2: Eurozone HICP (% y/y)
Source: Reuters EcoWin Pro, BNP Paribas
Chart 3: French HICP (% y/y)
Source: Reuters EcoWin Pro, BNP Paribas
Finally, note that there is a chance that core inflation
turned negative in Spain when we get the breakdown
in the final release on 14 May.
Luigi Speranza/Eoin O’Callaghan 7 May 2010
Market Mover
48
www.GlobalMarkets.bnpparibas.com