Charts of the year: What if inflation doesn’t show?

The European Central Bank is working hard to bump up inflation. What if it doesn’t work?

Frederik Ducrozet at Pictet raises this point in his charts of the year. He says:

Most indicators are consistent with a gradual increase in underlying inflation in 2016, albeit with a weak momentum and downside risks.

The ECB will monitor core prices very closely in 2016, looking for potential second-round effects from low energy prices, in particular. Although we expect HICP inflation to gradually rise towards the 2% target by 2018, risks are tilted to the downside relative to ECB staff projections.

The ECB relies to a large extent on a further passthrough from unconventional measures (QE and TLTROs), including a further depreciation in the trade-weighted euro that may not fully materialise. Any disappointment in core price data would likely force the ECB to respond with additional monetary stimulus, including another deposit rate cut and/or QE expansion, by Q2 2016 in our view.