Economy

Euro zone inflation at highest in four years

Data highlights challenges as European Central Bank weighs path to rate hike

The divergence between core and headline inflation underlines the ECB’s policy difficulty. Photograph: Reuters

Thu Mar 2 2017 - 10:38

Euro-area inflation accelerated to the fastest pace since January 2013, providing fresh arguments to those calling for an exit from the European Central Bank’s monetary stimulus programme.

Consumer prices rose 2 per cent in February from a year earlier, the European Union’s statistics agency in Luxembourg said. The rate was 1.8 per cent in January. Rising oil prices have been pushing up inflation across the euro area, including in Germany, its largest economy, Spain and Italy.

Meanwhile, the euro area’s core inflation, which strips out volatile elements such as energy was unchanged for the third consecutive month in February at 0.9 per cent. The divergence between the two inflation indicators highlights the challenges facing the ECB in choosing the right amount of monetary stimulus.

Headline data

While headline inflation is moving upward in line with the central bank's goal of a rate below but close to 2 per cent, the persistent weakness of core inflation is a source of concern for officials including ECB president Mario Draghi.

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The euro-area unemployment was unchanged at 9.6 per cent in January, the lowest since May 2009, statistics agency Eurostat said in a separate release on Thursday. In the same month, producer prices in the 19-member zone rose 0.7 per cent from December when they had increased 0.8 per cent.

Back in January, Mr Draghi pointed to a new set of criteria arguing that the return to the ECB’s inflation goal must be durable, self-sustained and representative of the euro area as whole. On that basis, the ECB may well look through the recent surge in prices because of the energy-cost effect.

The ECB’s latest projections foresee an average inflation rate of 1.3 per cent this year, before accelerating to 1.5 per cent in 2018. The central bank will update those forecasts on March 9th after a meeting of its Governing Council.

– (Bloomberg)

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