IMF forecasts euro area inflation to stay well below 2% target for years to come

by Marco Antonielli and Carlos De Sousa

[this article previously appeared on the Bruegel’s blog]

In the April 2014 update of the World Economic Outlook (WEO) released this week, the International Monetary Fund (IMF) forecasts a fall in the average inflation for the euro area to 0.9% in 2014, down from 1.3% in 2013. For 2015 and 2016, inflation is expected to remain well below the 2% policy rate, at approximately 1.2% and 1.3%. While the fall in inflation for 2014 was largely anticipated in recent estimates released by Eurostat, the IMF forecasts might be taken as further support for the claim that inflation will be lower than 2% in the medium term. Indeed, the IMF forecasts usually display a strong mean-reverting behaviour, i.e. a speedy convergence to the long term inflation rate, which in case of the euro area is anchored at below but close to 2%. This trend is quite apparent when we check the realized inflation against each year’s April forecasts from the IMF. This time however, the IMF recognizes that given the bleak outlook for the euro area real economy, if the ECB continues with its relatively hawkish monetary policy approach it will take 5 years for inflation to converge to just 1.5%.

Average euro area Inflation percent change in different vintages of IMF WEO

inflationSource: IMF WEOs

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