Underlying inflation in the euro zone ticked up this month, official data showed on Friday, welcome relief for the European Central Bank (ECB) as it braces for weak oil prices to drag consumer prices down in the coming months.
Having missed its inflation target for more than four years, the ECB is desperate to boost prices but has conceded that it will look past renewed commodity price weakness, even if it means taking even longer to get inflation back to 2 percent.
Inflation excluding volatile food and energy prices, a key measure watched by policy-makers, jumped to 1.2 per cent in June from 1 per cent a month earlier as services costs unexpectedly surged, putting core inflation well above market expectations for 1 per cent.
Headline inflation, targeted by the ECB at just below 2 per cent, meanwhile eased to 1.3 per cent from 1.4 per cent a month earlier, the European Union’s statistics office said, still coming above market expectations for 1.2 per cent.
Fighting ultra low price growth, the ECB is providing unprecedented stimulus with massive asset buys and negative interest rates, all in the hope of inducing borrowing and spending that will eventually feed into inflation.
But as growth is clearly picking up pace, ECB chief Mario Draghi this week raised the prospect of policy-tightening, arguing that better growth conditions are naturally providing more accommodation, so the ECB may have room to claw back some of its own measures.
Indeed, the ECB is expected to decide in September whether to extend or wind down its €2.3 trillion asset purchase scheme next year, having to reconcile an apparent contradiction between healthy growth and weak inflation. “We expect the ECB to announce the next adjustment to its policy parameters in the autumn in the form of another scale-down of the bond purchase volumes from the start of 2018 and generally a very gradual exit process,” Nordea economist Tuuli Koivu said. “If anything, slightly higher core inflation numbers would facilitate ECB’s communication later this year regarding the exit.”
The ECB’s biggest headache is that while growth is on its best run in a decade, wage growth actually eased to an anaemic 1.4 per cent in the first quarter, suggesting very little inflation pipeline pressure. The euro’s 9 per cent gain on the dollar this year, partly due to Mr Draghi’s more hawkish comments, also put a lid on inflation, likely to make the ECB cautious about policy tightening. Still, the ECB seems to have fought off the threat of deflation, consumption is robust and household borrowing is at its best rate since the global financial crisis, likely keeping modest but persistent pressure on inflation.
ECB projections indicate that inflation will not reach the banks target even by 2019 and persistent oil price weakness could force the bank to cut forecasts even further.
Reuters
