Eurozone inflation above target for first time in 4 years

AP News
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Posted: Mar 02, 2017 6:52 AM
Eurozone inflation above target for first time in 4 years

LONDON (AP) — Inflation across the 19-country eurozone is running above the European Central Bank's target for the first time in four years — but don't expect the ECB to reverse its monetary stimulus anytime soon.

Eurostat, the European Union's statistics agency, said Thursday that consumer prices across the eurozone were 2 percent higher in the year through February. That was up from the 1.8 percent recorded the previous month and just ahead of market expectations for a 1.9 percent rate.

With inflation now ahead of the ECB's target of just below 2 percent for the first time since January 2013, it may seem like a case of job done for the ECB, which has slashed interest rates and enacted a massive bond-buying program to support inflation and growth.

The increase in inflation, however, is unlikely to prompt the ECB to ease up on its monetary stimulus at next week's policy meeting because it was mainly due to a surge in oil costs. Underlying price increases, which are effectively linked to the strength of the economy through such things as wages, remain subdued.

"The continued impact of transitory factors on the headline rate, coupled with the continued limited pass through to core inflation, should see the ECB leave both policies unchanged at its meeting next week and also resist calls to adjust its forward guidance for the time being," said Cathal Kennedy, European economist at RBC Europe.

The core inflation rate, which strips out the potentially volatile items of food, energy, alcohol and tobacco, was unchanged at 0.9 percent in February. It's stubbornly stayed there since December, during which time the headline rate has nearly doubled from 1.1 percent.

Energy prices were a massive 9.2 percent higher in February than the year before. That's largely due to the near doubling of oil prices in the past year as oil producers have scaled back output and fears of a slump in demand, most notably in China, have abated.

The upward push on inflation by energy prices is equivalent to the drag they were having over the past couple of years, when oil prices tanked from around $100 a barrel to below $30. During that time, inflation across the eurozone sank and at several times, consumer prices were actually falling — a phenomenon known as deflation that can hurt an economy as consumers put off purchases in the expectation of lower prices and firms grow reluctant to innovate and invest.

It was that deflation threat that prompted the ECB to slash its main interest rate to zero, start charging banks to park their cash at the central bank and buy more than a trillion euros worth of bonds. The main reasoning behind the stimulus has been to get inflation back to target by lowering borrowing rates and promoting economic growth.

In December, the ECB decided to continue bond purchases through the end of this year while reducing them from 80 billion euros ($84 billion) a month to 60 billion euros a month from April. Most analysts think the bank will not back off its stimulus but may signal at some point this year its intentions to start tapering it off gradually in 2018.

ECB President Mario Draghi has indicated that the central bank will tolerate a temporary rise in inflation above the target.

Though the inflation rate's rise in recent months has surprised many observers, there is a consensus that inflationary pressures will start to fade in the middle of 2017 when prior oil price rises fall out of the annual comparison. Also, the economic outlook remains clouded by a raft of elections in Europe as well as the start of Britain's discussions to leave the EU.

"Although inflation has reached the ECB's target, core inflation remains subdued and upcoming elections in the Netherlands, France and Germany could derail business confidence and thereby hinder economic activity," said Oliver Kolodseike, senior economist at the Centre for Economics and Business Research in London.

Ahead of those elections, the eurozone economy has shown signs of picking up steam, and surveys show businesses expect faster growth to come.

Unemployment has also fallen steadily. Figures released Thursday by Eurostat showed the eurozone's jobless rate held at 9.6 percent in January, its lowest level since May 2009. The figure masks the fact that the number of unemployed people fell by another 56,000 during the month.