reflation and monetary policy retreat are the themes of the day in the u.s. but in europe, the latest inflation figures paint a different picture. the european central bank still has choppy waters to navigate. eurozone inflation hit its highest level in november since april 2014, but at just 0.6%, it remained far adrift of the ecb<u+2019>s target of below but close to 2%. headline inflation will rise further as the drag from energy prices turns into a boost: citigroup forecasts a rate of 1.5% in the first quarter of 2017. that will raise more questions about the future of the ecb<u+2019>s bond-buying program, already the source of speculation in markets addicted to the flow of asset purchases. but core inflation<u+2014>excluding energy, food, alcohol and tobacco<u+2014>just isn<u+2019>t budging. it stood at 0.8% in november, the same as in the previous three months. services inflation, a proxy for domestic price pressures, is just over 1%. while headline inflation is set to rise, it isn<u+2019>t clear that core will follow. barclays forecasts average core inflation in 2017 of 1%. that, combined with the eurozone<u+2019>s still-high unemployment rate, provides backing for continued very accommodative monetary policy, even if the ability of central bankers to achieve their aims is increasingly in doubt. it remains to be seen whether the ecb can reframe the debate, while sticking to its mandate. a key judgment will be whether the rise in headline inflation is sustained. there could be greater discussion of pay dynamics<u+2014>the notes from the ecb<u+2019>s october meeting highlighted subdued growth in eurozone wages, up 1.1% from a year earlier in the second quarter. the market<u+2019>s focus at next week<u+2019>s ecb meeting will be on the exact details of bond purchases , particularly with political risk in italy and france hitting bond markets and u.s. rates rising. but investors shouldn<u+2019>t lose sight of the big-picture backdrop of limp inflation. write to richard barley at richard.barley@wsj.com
europe: a tale of two inflation rates  - wsj
richard barley