Eurozone core inflation revised up, helping euro to climb

AP News
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Posted: Mar 17, 2016 8:06 AM
Eurozone core inflation revised up, helping euro to climb

LONDON (AP) — Underlying inflation pressures in the 19-country eurozone were not as subdued in February as initially thought, official figures showed Thursday, in a development that's helped the euro climb to five-month highs against the dollar.

The European Union's statistical agency said Thursday that the core rate, which strips out energy, food, alcohol and tobacco, was 0.8 percent in the year to February, up from the initial estimate of 0.7 percent.

The headline number, which includes those typically more volatile items, was left unchanged at minus 0.2 percent. The negative rate was the main reason behind the European Central Bank's decision last week to expand its stimulus measures for the eurozone economy.

The ECB is worried that low or negative inflation will become embedded into expectations to the detriment of the wider economy. For example, if consumers expect a sustained period of falling prices, or so-called deflation, they may delay spending. And businesses may opt against investing.

The figures showed 11 countries that use the euro have inflation rates below zero. Cyprus and Spain have remarkably weak inflation rates of minus 2.2 percent and 1 percent. Others like Austria and Belgium aren't suffering the same phenomenon, with positive inflation rates of 1 percent and 1.1 percent respectively.

Given the backdrop across most of the eurozone, the ECB backed another big package of stimulus measures last week. As well as expanding its monthly government bond purchases, it cut all its main interest rates, including a surprise reduction in the rate banks pay to borrow from the ECB to zero. It hopes the package will shore up economic activity, boosting inflation.

The ECB will be hoping that with oil prices having recently recovered from multi-year lows inflation will start pushing higher in the coming months. The ECB aims to have the inflation rate just below 2 percent.

Few economists think the headline rate is heading back toward that target anytime soon given tepid economic growth in the eurozone, a slowing Chinese economy and low inflation expectations.

Danae Kyriakopoulou, senior economist at the Centre for Economics and Business Research, expects the headline rate across the eurozone to at least start rising soon largely because of a pickup in oil prices. However, she thinks the core rate could actually start to slide back as the increase in oil prices dents demand for other goods.

"The rises in oil prices act to reverse the boost that consumers have enjoyed given the eurozone's status of a net oil-importing region," she said.

ECB President Mario Draghi indicated that further cuts in the rate the central bank charges commercial banks on their deposits were unlikely and that has helped the euro push higher — lower rates can weigh on a currency as the returns available to investors are reduced. Wednesday's decision by the U.S. Federal Reserve to keep its own interest rates unchanged and its suggestion that increases this year will be limited have also pushed the euro higher.

Following the figures, the euro was up 1 percent at $1.1328, its highest level since Oct. 20.