Oil price falls will depress inflation for some time yet

Euro-zone consumer price inflation looks likely to pick up later this year, driven by the fading direct effect of lower oil prices and the feed-through of previous falls in the euro to consumer prices. But these effects should be temporary. The indirect effects of lower oil prices, which have lowered producers’ costs significantly, should continue to bear down on inflation for some time to come.

What’s more, long-term inflation expectations remain very low. If the ECB is to counteract the weakness of underlying price pressures, it will need to act decisively in March. We think that the Bank will cut its deposit rate again and increase the pace of its monthly asset purchases.