Inflation fell again in November to 0,3% y/y, returning to the level seen in September. Core inflation stopped at 0,7%, a new low since 1998. The drop in inflation since June (0,5% y/y) is explained almost entirely by the dynamics of energy and only for a tenth by the core inflation.
It is now clear that euro area inflation will remain at significantly lower levels than those estimated up to two months ago, when we expected a year end of around 0,6% and significantly below 0,7% assumed by the ECB. The most recent trend in inflation is explained by the sudden drop in the price of energy raw materials, which started in July, and only marginally by the drop in domestic prices.
However, the percentage of goods with price changes below zero in October was back to its highest level since 2009. For services, the percentage with price changes below 0 has remained stable in recent months, but the percentage with price changes has risen to new highs prices below 1. In the following we try in particular to evaluate the impact of the drop in the price of crude oil on the growth and inflation scenario.
Following OPEC's decision not to cut production to preserve market share, we significantly revised our oil price estimates downwards for 2015-16 from $100 a barrel to $72 in 2015 and from $101 to $78, respectively. per barrel in 2016. We have also trimmed the estimates for the EUR exchange rate to 1,20-1,21 in the first half of 2015 from a previous 1,25-1,26.
It should be noted that sudden falls in the price of oil have already occurred in the past, generating high volatility in the inflation dynamics. But unlike the 2009 shock, there are reasons to believe that the decline in oil prices may be more persistent. The market will be characterized by a large oversupply in the first half of the year and it will take many months to balance supply and demand.
What is the impact of oil and foreign exchange? An assessment of direct impacts
The immediate impact of the drop in oil prices generates savings for the net oil and fuel importing country through the trade balance. The impact is partially offset by a decline in exports to oil-exporting countries. Considering the level of net imports of crude oil in 2013, this price change leads to a reduction in imports equal to 0,4-0,6% of GDP for the main euro area countries.
The impact on GDP is less due to the probable contraction of exports to producer countries, conservatively estimated at 0,1-0,2% of GDP. The net effect due to the drop in oil prices alone (i.e. without considering the delayed effects that could occur on natural gas), is therefore equal to 0,3-0,4% for the three largest economies of the Eurozone, including the 'Italy, and it may be marginally wider for Spain.
