We see subdued wage growth in the euro area, suggesting that the output gap is still exerting downward pressure on wages. The so-called core measures of inflation – which strip out volatile components – have also been drifting down since mid-2012 when the euro crisis hit its climax, and have been hovering around 1% for nearly two years.
The increase in October to 1.1%, while encouraging, is not sufficient to fundamentally change that picture. Low core inflation is not something we can be relaxed about, as it has in the past been a good forecaster for where inflation will stabilise in the medium-term.