Overview: The January inflation numbers showed some return of inflation following several months of negative headline readings and low core numbers. Total CPI increased by 0.3% m/m (Cons: 0.3% m/m, DB 0.3% m/m) taking the annual growth rate a tick further down to 0.0%. At the core level prices rose by 0.2% m/m (Cons: 0.1% m/m, DB: 0.2% m/m) with the annual rate declining to 1.7% from previously 1.8%.

The somewhat higher than expected core inflation might reduce the fear of deflation in the markets. Also recent consumer surveys have shown that long-term inflation expectations have been moving back up.

Details: The impact from the lower energy prices is now fully absorbed in the monthly numbers and we do not expect further declines in the energy index. In fact energy prices rose by 6.0% m/m s.a. in January, con-tributing 0.1pp to overall CPI. Hence, the entire windfall gain from energy prices to consumer disposable in-comes has now arrived, and from now on consumers will be left with nominal income gains, which is in deeply negative territory due to the current sharp cut back in payrolls.

Interestingly, core CPI revived somewhat in January. The primary driver of this kick-back was a rebound in core goods inflation, which rose by 0.1% m/m up from -0.2% m/m in December. The explanation is most likely that the heavy discounts in November and December has distorted the seasonal factor. Or put differ-ently, the discounts simply arrived earlier and more forcefully than usual because of the crisis. A minor pick-up in core service inflation was also evident.

Assessment & Outlook: Although energy prices have stopped falling, we are going to see much further de-clines in the annual headline inflation in the coming months as a major base effect is set to kick in. We ex-pect annual headline inflation to reach a low of -2.5% by mid year before recovering.

The downward pressure on core inflation will be substantial over the coming quarters. Firstly, lower unit la-bour cost growth, negative second round effects from commodity prices and further destocking in the economy is set to push the underlying trend even lower. Moreover lower housing cost inflation will keep the rent-of-shelter component very low for a sustained period. Given these prospects, we expect core CPI infla-tion to ease further this year approaching a level close to 1% by early next year.


Danske Bank


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