The ECB revised its headline inflation projection considerably higher in 2017, lifting it slightly in 2018 while keeping it unchanged in 2019. The higher near-term inflation forecast reflects higher energy and food price inflation forecasts from the ECB whereas the core inflation projection was unchanged at 1.1% in 2017.
The ECB revised its core inflation forecast slightly higher for 2018 and 2019 by 0.1pp in both years due to 'some indirect and second-round effects from higher oil prices, as well as some upward effects from the lower euro exchange rate' .
In our view, the ECB's core inflation forecast is still very optimistic due to the following:
1. The ECB's core inflation forecast hinges on higher wage growth
2. Labour market slack suggests wages will stay low in 2017-18
3. Even German wage growth is low despite the tight labour market
4. The ECB's model for core inflation is subject to mean reversion
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