Eurozone inflation (surprise)

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TheEuropean Central Bankmeets today/tonight depending where you’re reading!  One thing that will be on their mind, whether they admit it or not, will be the sharp turnaround in inflation seen for the Eurozone.  As we looked at earlier today there has been a noticeable shift in the global trends in inflationaway from deflation, and possibly towards hyperinflation.  Europe is no exception, the chart shows the turnaround in headline CPI inflation from the depths of the deflation scare in January 2015 to a 3 year high in December 2016.  And this has taken most bysurprise, as you can see with the dramatic surge in the Citi Eurozone Inflation Surprise Index rising to a 5 year high.

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The “so what” comes when you think about the ECB’s mandate – to keep inflation positive, but below 2%.  It’s clear then that the best days of ECB stimulus have been an gone when you see inflation on the rise like this, so the open question on this will be “where to next for European bond yields and the Euro itself?”  You’d have to think, all else equal, that the answer may well be up in both respects.  What that will do for theequity valuation gapremains to be seen…
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