Euro inflation at lowest in over four years

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br inflation Bloomberg The headquarters of the European Central Bank in Frankfurt, Germany. Consumer inflation in the euro zone declined to 0.5 percent last month, according to preliminary estimates released yesterday. This is well short of the central bank's medium-term target of just under 2 percent. Photo: Bloomberg

Brussels - Euro zone inflation slowed last month by more than economists forecast to the lowest level in over four years, keeping pressure on the European Central Bank (ECB) to take action to foster the bloc’s recovery.

Consumer prices grew 0.5 percent in the year, after a 0.7 percent gain in February, the EU’s statistics office in Luxembourg said yesterday. That fell short of the 0.6 percent median forecast in a survey of 41 economists. The inflation rate has been below 1 percent for six months, while the ECB seeks to keep it at just under 2 percent.

The March rate is half of the ECB’s forecast for this year and well below the central bank’s medium-term objective. Only three of 57 economists in a separate Bloomberg survey expect the ECB to cut its benchmark interest rate when policymakers meet on Thursday in Frankfurt. The rest expect it to remain unchanged.

“They will be very uncomfortable with a 0.5 percent inflation rate, though they would expect that to bounce back in April,” Chris Scicluna, the head of economic research at Daiwa Capital Markets in London, said. “On balance they would believe that the number itself doesn’t merit further action given that the forecast is for it to trend higher. It’s definitely a presentational challenge, 0.5 percent is not where any central bank in its right mind would want it to be.”

On March 25 ECB president Mario Draghi renewed his vow to “take additional monetary policy measures”, if “any downside risks” appeared to its forecast for a “gradual closing of the output gap in the coming years”. These risks included subdued prices and a strengthening euro, he said.

International investors are returning to the euro zone, including nations that received bailouts in the depths of the crisis. US exchange-traded funds show net inflows of $634 million (about R7 billion) into Spain this year, marking an increase of 71 percent, Bloomberg data show. Flows into Greece have risen 77 percent to $102m.

Energy prices fell 2.1 percent last month after a 2.3 percent decline in February, yesterday’s report showed. Prices of alcohol, food and tobacco climbed 1 percent after a 1.5 percent rise in February, according to Eurostat. The cost of services rose 1.1 percent after a 1.3 percent increase.

The core inflation rate, which excludes volatile items such as energy, food, alcohol and tobacco, rose 0.8 percent after a 1 percent jump in February.

Indications that the euro area’s recovery is gaining traction have been mounting, including economic confidence increasing more than forecast last month. Yet the currency bloc remains dogged by near-record unemployment and anaemic price growth as it struggles to expand output.

“For the euro area as a whole we can expect positive growth, while we were negative in 2013,” ECB governing council member Ewald Nowotny told Österreich newspaper in an interview published yesterday. “In this sense, we’ve overcome recession, but this doesn’t mean that all problems have gone away.”

ECB governing council member Jens Weidmann said on Saturday that the recovery would push inflation rates back up. “With regard to the currently low level of inflation in the euro area, one should bear in mind that two-thirds of this deceleration of prices can be attributed to energy and unprocessed food prices, which is to say cyclical factors that are likely to be temporary.”

Yesterday’s inflation data were estimates. The statistics office will release final figures for March on April 16. – Bloomberg

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