Market-based measures of euro area inflation expectations have shifted lower, which could point to a delay in monetary policy normalisation. The first chart below shows the EUR 5Y5Y forward inflation swap, which has dropped sharply in recent weeks. A few years ago, this would have fuelled speculation of a shift in monetary policy given that ECB President Mario Draghi had previously indicated that the Governing Council were closely following this indicator. Inflation breakevens for Germany, France and Italy have similarly lurched lower, with the chart below showing a 10-30bp drop in the 5-year benchmarks over the last fortnight.

On the face of it, this would appear to be largely driven by the oil market correction given the 30% drawdown from peak in euro-denominated oil prices. However, we would also point to mounting evidence of a broad deterioration in economic activity across the euro area which suggests that core inflation could come under pressure. The last chart shows our leading indicator for eurozone core CPI has been gently rolling over all year, and we would expect headline CPI to soon come under greater pressure due to the influence of oil.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception