BofAML: Más (mala) inflación (Europe Economic Weekly)

Redacción - Viernes, 27 de Enero

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Europe Economic Weekly: More (very bad) inflation •   Euro area inflation will rise briskly - we expect 1.7% yoy in January. This comes with downside risks to domestic demand. •   This week we look at corporates. Pricing power remains weak. Higher input costs lower margins, profits and capex prospects.
•   UK: we expect BoE to avoid sounding too hawkish in next week's Inflation Report.

The brisk acceleration in Euro area inflation due to energy prices will be a challenge for growth. It results from a negative supply shock on oil prices, and that brings the 'bad' type of inflation. Low and sticky nominal wage growth means that purchasing power of consumers suffers again very soon. But it does not stop there. We take a look at profitability implications in the non-financial corporate sector.

The price balances in the composite PMIs has deteriorated quickly (Chart 1) as oil prices push input prices higher but have not translated in higher output prices: pricing power still remains weak, and margins get squeezed. In our main article this week, we go into the details. But so much up front: current PMI price balances would signal 1.5ppt decline in the profit share in gross value added. This, in turn, would typically lower the capex growth trajectory by 1ppt, a downside risk domestic demand in 2H17. Hawks should keep that in mind when they see 'flash' January inflation prints next week - we have just upwardly revised our Euro area expectations for that month to 1.7% yoy (more details in our Weekly View).

At member states' level, politics trumped data this week. In Germany, social democrats' freshly nominated lead-candidate for next year's election could bring a little more swing in the debate around fiscal policy, although not changing the 2017 stance. In Italy, the constitutional court has clarified the electoral law, but if that leads to early elections is purely down to political will. In France, all eyes are on Sunday's socialist primaries.In the UK, we continue to think that the upside hard-data (GDP this time) is unsustainable given the looming income squeeze for consumers. We expect the Bank of England's February Quarterly Inflation Report published next Thursday (2 February) to remain neutral rather than becoming outright hawkish.

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