Relief for ECB as eurozone inflation ticks up

The headquarters of the European Central Bank is pictured through plants in Frankfurt, Germany, Wednesday, Sept. 7, 2016. (AP Photo/Michael Probst)

BRUSSELS/FRANKFURT, Germany: Inflation in the eurozone ticked up in September, data showed Friday, giving the European Central Bank some confidence its stimulus program is pulling the bloc’s economy away from the deflationary brink. Consumer prices grew by 0.4 percent, twice as fast as in August, Eurostat data showed, moving further away from the sustained and economically dangerous fall in prices that can accompany economic crises.

The improvement, while small, will ease pressure on the ECB to expand its 1.74 trillion euros ($1.94 trillion) and counting money-printing program. Some rate setters, such as board member Sabine Lautenschlaeger, have been arguing for delay in a new boost to allow the program to work first.

September’s improvement was mainly due to a smaller decline in energy prices, which had been pummeled by a drop in the market value of oil. The price of crude has recently stabilized and it strongly rebounded this week after the Organization of the Petroleum Exporting Countries flagged its first output cut in eight years.

“We know central banks have run out of ammunition so an increase in oil prices over time is going to help inflation higher,” Kenneth Broux, a strategist at Societe Generale, said.

“If expectations of oil prices increase, in the long run it’s going to bring back some investment, which is positive for inflation and growth.”

When energy prices are stripped out, inflation came in at 0.8 percent in September, missing market expectations for a 0.9 percent reading. Inflation minus energy and food prices was also at 0.8 percent.

Both headline and core inflation are well below the ECB’s target of almost 2 percent.

This showed the ECB’s job was far from done.

“The main negative surprise was to core prices ... suggesting that the outlook for underlying inflation remains surrounded by downside risks,” Barclays economist Fabio Fois said in a note.

The eurozone data came a day after signs of growing inflation in Germany and Spain, the bloc’s No. 1 and No. 4 largest economies.

German inflation hit its highest level in 16 months and Spanish consumer prices rose for the first time since May 2014.

The ECB expects the bloc’s inflation to average 0.2 percent this year before jumping to 1.3 percent in 2017, mainly thanks to higher energy prices, and 1.6 percent in 2016.

It said last month it is looking at ways to ensure its current 80 billion euro bond-buying program, due to run at least until March, can continue amid growing fears it could run out of bonds to buy in countries such as Germany.

Options include changing the amount of bonds it buys, the country composition of the program and the minimum yield. A decision is most likely to come in December, when the ECB unveils its new staff forecast.

A version of this article appeared in the print edition of The Daily Star on October 01, 2016, on page 5.




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