Eurozone inflation remains negative but poised for oil boost

AP News
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Posted: May 31, 2016 6:53 AM

LONDON (AP) — Consumer prices across the 19-country eurozone fell again in May but look set to rise in the months ahead due to the recent pick-up in oil prices — an outlook that means the European Central Bank will likely refrain from announcing more stimulus measures this week.

Official figures published by statistics agency Eurostat on Tuesday showed inflation in the year to May was minus 0.1 percent, up slightly from the previous month's rate of minus 0.2 percent.

Inflation across the eurozone has been below zero at various moments over the past year and a half due to a combination of factors, particularly the weakness of the economy, which keeps wage increases subdued. But crucially, the sharp fall in energy and raw material prices has weighed on consumer prices. In May, an 8.1 percent annual drop in energy prices was largely behind the negative rate.

When energy costs are stripped out, alongside other typically volatile items such as food, tobacco and alcohol, the so-called core inflation rate was 0.8 percent in the year to May, slightly up from the previous month's rate of 0.7 percent.

Whichever measure is used, inflation in the eurozone remains at historically low levels and that's a worry for those setting monetary policy. The ECB's primary goal is to maintain a headline inflation rate just below 2 percent, but it's been below target since February 2013.

A prolonged drop in prices can weigh heavily on an economy, as Japan's experience over the past quarter of a century can testify to. So-called deflation can become a vicious cycle and push prices down further. Falling prices could prompt consumers to delay purchases and businesses to shy away from investments.

Over the past few months, the ECB has grown more aggressive in its policymaking to push up inflation. It has slashed interest rates, including its main refinancing rate to zero, and expanded its bond-buying program. And it's indicated it could do more in the future.

However, few experts expect any further action at this Thursday's policy meeting of the ECB's governing council, largely because the more recent stimulus efforts are still working their way through the economy.

Also, the recent pick-up in oil prices — last week a barrel of crude recently pushed above $50 for the first time in 2016 — is set to help push the inflation rate above zero as soon as next month.

"Unless oil prices drop back sharply, headline CPI inflation will undoubtedly climb over the coming months as negative energy effects finally fade," said Jonathan Loynes, chief European economist at Capital Economics. "But core price pressures look likely to remain subdued, not least due to the continued weakness of wage growth across the region."

How wages fare over the coming months will hinge largely on how the labor market performs. Rapid falls in the number of unemployed could swell wages, which should eventually trickle down to higher prices if the bigger pay packets are spent.

Separate Eurostat figures Tuesday showed further improvements in the labor market, with another 63,000 people coming off the jobless total, which now stands at 16.42 million. Still, the unemployment rate held steady at 10.2 percent in April, which is high relative to other economies such as the U.S., where unemployment is around half that rate.

Economists said it's particularly encouraging that much of the recent improvement in the labor market has emanated from those countries that have been at the forefront of the region's debt crisis over the past few years. That's evident in Spain, where the number of unemployed has fallen by more than 600,000 over the past year to 4.6 million, a reduction that's taken the jobless rate down to 20.1 percent from 22.9 percent.

"The downward trend in the jobless rate will likely persist in coming months, reflecting improving economic conditions around the monetary bloc, labor market reforms, and a strengthening industrial base in Spain, Portugal and Ireland," said Martin Janicko, economist at Moody's Analytics.