Eurozone inflation falls despite thriving economy

AP News
Posted: Jan 05, 2018 6:38 AM
Eurozone inflation falls despite thriving economy

LONDON (AP) — Inflation across the 19-country eurozone remains stubbornly low even though the economic recovery across the single currency bloc appears to be gaining more and more momentum.

At first glance, that's a bit of a paradox: a buoyant economy should help reduce unemployment, stoking wages and consumer prices. But in the wake of a near-decade economic crisis that saw unemployment in many parts of the region jump dramatically, that economic transmission mechanism appears to have broken down, for now at least, with workers still too wary to ask for big wage gains.

Official figures released Friday showed consumer prices rose 1.4 percent in the year to December, down from the previous month's 1.5 percent rate, largely because of a smaller rise in energy prices.

The decline pushed inflation even further away from the European Central Bank's policy goal of just below 2 percent. Of perhaps greater concern to policymakers at the bank is that the core rate as measured by statistics agency Eurostat, which strips out potentially volatile items such as energy and food, remained even lower at 0.9 percent.

That is a clear indication that wage rises remain subdued across the eurozone even though the recovery is going great guns and the ECB has slashed interest rates and pumped hundreds of billions of euros into the eurozone economy.

A series of surveys have shown that the super-cheap monetary policy pursued by the ECB is one factor behind the burgeoning recovery — financial information firm IHS Markit said growth in the fourth quarter could come in at an impressive quarterly rate of 0.8 percent.

The recovery has been given further impetus by the fading away of key risks. Worries that populist politicians across the eurozone would win power in a series of elections in 2017, notably in France and the Netherlands, failed to materialize while concerns over the future of Greece in the eurozone have eased markedly.

Unemployment across the eurozone has been falling steadily, notably in Spain, which endured a sky-high rate of around 25 percent for years. Still, unemployment across the region remains relatively high at 8.8 percent, more-or-less double the rate in the United States.

The ECB remains convinced that the sustained fall in unemployment will eventually start to work its way through into higher wages, which should help inflation get to its target rate. How quickly that happens is likely to determine when the ECB ends its massive bond-buying stimulus program, which is currently set to last at least through September.

ECB President Mario Draghi has argued that the recent era of low interest rates and negligible inflation may have convinced wage negotiators to settle for lower pay deals, with many possibly more focused on keeping jobs than securing higher salaries.

He has laid out his hope that these factors are likely to be "transitory" and that with spare capacity in the economy diminishing, wages should start to pick up, supporting consumer demand and boosting consumer prices.

Bert Colijn, senior eurozone economist at ING, said there are signs in surveys that the normal transmission mechanism by which higher growth leads to higher pay and inflation is beginning to show itself and that wage growth will "start to pick up more meaningfully this year" as firms look to hire to meet demand. He is predicting the core rate to end the year at 1.5 percent.

"Therefore, the ECB is unlikely to change course early in the year, even if economic data continues to surprise on the upside," he said.