Less pressure to unwind eurozone stimulus as inflation eases

AP News
Posted: Mar 31, 2017 6:49 AM
Less pressure to unwind eurozone stimulus as inflation eases

LONDON (AP) — Inflation across the 19-country eurozone fell sharply in March due to weaker price increases partly related to the timing of Easter, official figures showed Friday, in a development that's likely to ease the pressure on the European Central Bank to rein back its stimulus efforts soon.

The European Union's statistics agency, Eurostat, said the annual consumer price inflation rate was 1.5 percent, down from February's four-year high of 2 percent. That puts inflation back below the ECB's target of just under 2 percent.

A sizeable decline in inflation had been anticipated after weak German inflation figures, which are released ahead of those for the overall eurozone. But the scale of the fall has prompted some in the markets to suggest that inflation in the region may have peaked given that last year's rise in oil prices are slipping out of the annual comparisons.

The spike in inflation in recent months has been largely due to the sharp rise in oil prices over the past year, though they have dipped over the past month from recent highs. In March, they were still 7.3 percent higher on a year-on-year basis but that was a full two-percentage points down from the previous month's rate.

"Fluctuations in the oil price have led to heightened volatility in the headline inflation index in recent years, which is why the European Central Bank stressed at its latest policy meeting that any decision to change monetary policy would need to be based in a sustained change in core inflation," said Kay Daniel Neufeld, an economist at the Centre for Economics and Business Research.

The ECB has enacted a broad package of measures over recent years to get eurozone inflation up toward its target and shore up the economic recovery, including cutting its main interest rate to zero and buying government bonds from financial institutions to keep a lid on market interest rates. In recent months, there has been pressure on rate-setters to consider reversing their stimulus policies as inflation went above target — albeit for one month — and growth has improved.

The likely concern for ECB policymakers is the fact that underlying price increases remain weak and, according to Friday's figures, are getting weaker. The annual core inflation rate, which strips out the volatile items of food, energy, tobacco and alcohol, fell to 0.7 percent from 0.9 percent. That points to weak wage growth in the eurozone even at a time when unemployment has been falling consistently for months.

Jack Allen, European economist at Capital Economics, said the fall in the core rate should be treated with some caution as a result of the timing of Easter. Last year's earlier Easter brought forward spending into March as opposed to this year, when it's in mid-April.

"Accordingly, core inflation will probably nudge back up to 0.9 percent next month," he said. "Nevertheless, underlying price pressures remain subdued."