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EUROPE ECONOMICS: UBS Sees Eurozone Inflation Increasing, But Not Likely to Last

· 01/25/2021 06:43

11:41 AM EST, 01/25/2021 (MT Newswires) -- UBS said, that after five months in negative territory, it expected eurozone inflation to turn positive in January, rising to 0.1% y/y from -0.3% in December.

According to the bank's baseline forecast, headline inflation will rise to 1.4% y/y by May, a level last seen in January 2020. It thought the pick-up will be driven by a number of special factors, like tax increases and energy base effects, which will be only temporary.

UBS predicted the pick-up in eurozone inflation in January to be largely driven by price increases in Germany and France. Firstly, it estimated German headline inflation to rise by 1.2pp to +0.5% y/y in January, due to two factors -- a reversal of the July 2020 VAT (sales tax) cut, and higher energy prices caused by the new carbon dioxide (CO2) pricing for the heating and transport sectors.

Secondly, in France, the start of the winter sales was delayed by two weeks (to last Wednesday) due to the recent measures to curb the second wave of COVID-19.

Assuming no sharp declines in oil prices in the coming months, last year's drop should generate very significant positive energy-related base effects, wrote the bank in a note to clients. Specifically, UBS calculated that the largest contribution will be in May 2021, adding 0.5pp to eurozone headline inflation.

Cumulatively it thought the base effect should add 1.1pp to eurozone inflation between February and May

UBS maintained the view that inflation was likely to remain subdued over the medium term, given a wide output gap and tame wage dynamics. It forecasted inflation to average 1.1% this year and 1.3% in 2022.