French and German central banks cut inflation projections for next two years

France and Germany's central banks both revised their inflation forecast for 2016 downwards from earlier efforts today (December 4). Falling energy prices were the key factor in driving expected inflation down, the banks said.

The Deutsche Bundesbank predicted the annual harmonised index of consumer prices (HICP) for Germany would reach 1.1% in 2016, a significant fall from its June prediction of 1.8% for the year.

It said this was largely due to "the renewed downturn in crude oil prices, which had not been expected in June". In 2017 it expects inflation to reach 2%, again down from its June forecast of 2.2%. The Bundesbank warned "price developments might fluctuate strongly, both upwards and downwards, from the underlying assumptions".

The Banque de France, meanwhile, said it expected inflation to reach 1% in 2016. Core inflation – the HICP excluding energy and food – was expected to rise to 1.1%.

In its macroeconomic projections released in June, the bank forecast a higher headline rate of 1.4%. It said the cut was due to "a sharper-than-expected fall in oil prices and downward revisions to imported goods prices".

Falling food and energy prices would rebound over the next two years, the bank believed. It forecast a headline rate of 1.5% in 2017, 20 basis points lower than in June, and a core rate of 1.3%.

Looking forward, the bank said possible "downward factors" affecting future inflation, including "persistently high unemployment and the downward revision to global growth" outweighed potential inflationary factors, such as rising corporate profit margins and a firmer eurozone recovery.

The HICP is the inflation methodology compiled by Eurostat and used by all eurozone member states. Both central banks release macroeconomic projections for the two years ahead every June and December.