Euro-Area Inflation Accelerates as Food Costs Offset Energy Drop

Euro-area inflation accelerated in May, led by food and services costs and adding to signs that the 17-nation currency bloc is starting to emerge from a record-long recession.

The annual inflation rate rose to 1.4 percent from 1.2 percent in April, the European Union’s statistics office in Luxembourg said today. That’s in line with the median estimate in a Bloomberg News survey of 46 economists. The rate has been below the European Central Bank’s 2 percent ceiling since February.

The ECB’s Governing Council will keep its benchmark rate at a record low of 0.5 percent when it meets on June 6, according to the median of 33 economists in a separate Bloomberg survey. With the euro area mired in an 18-month recession, ECB policy makers are seeking ways to stimulate the economy. President Mario Draghi has indicated he’s ready to reduce borrowing costs further if the economic outlook deteriorates.

“As long as the ECB’s baseline scenario of some recovery in the second half of the year remains in place I would be very surprised if they cut rates again over the next couple of months,” said Janet Henry, chief European economist at HSBC Holdings Plc. “They need to see a further deterioration from where we are currently rather than the stabilization they expect to see around the middle of the year.”

Crude Prices

The euro area’s 18-month recession will end in the second quarter, as the economy stagnates before returning to growth in the following three months, according to another Bloomberg survey. The economy contracted 0.2 percent in the first quarter.

Energy costs dropped 0.2 percent in May after a 0.4 percent decline a month earlier, today’s report showed. Prices of food, alcohol and tobacco rose 3.3 percent, compared with 2.9 percent in March, while the cost of services increased 1.4 percent after a 1.1 percent gain in the previous month.

West Texas Intermediate crude is headed for a third weekly decline after U.S. stockpiles climbed to the most in more than 80 years. The Organization of Petroleum Exporting Countries can maintain its production quota while Brent is trading around $100 a barrel, some group members said before its first meeting of the year today.

Hellenic Petroleum SA, Greece’s biggest refiner, posted a 78 million-euro ($102 million) loss in the first quarter, compared with a 71 million-euro profit a year earlier, as the country went through “the worst ever heating diesel season,” the company said yesterday.

‘Perfect Storm’

Diesel use in Germany, Europe’s largest economy, dropped 7.8 percent in March from a year earlier, according to the Association of the German Petroleum Industry.

European energy companies including EON SE, Germany’s largest utility, GDF Suez SA, Enel SpA and Iberdrola SA, demanded policy changes in the energy industry to ensure future supply in a letter to EU leaders last week. Stagnating prices and slowing growth are creating a “perfect storm” that threatens investment, they said.

Draghi said last week that his pledge to buy government bonds is helping to ensure that interest-rate cuts reach the parts of the euro-area economy that need them the most.

Executive Board member Joerg Asmussen said this week that while policy makers are having “an open discussion” about lowering the deposit rate, some are “more open than others” to the idea. Governing Council member Christian Noyer said he’s not convinced about the merits of the policy.

“I think a negative deposit rate is a clear manifestation that the ECB wants to have a weaker exchange rate,” said Hans Redeker, global head of currency strategy at Morgan Stanley. “When you look at Europe’s economic performance, it has disappointed. Overall this is an economy where credit is not flowing. You have to think about how you’re going to change this, and ultimately the exchange rate has to come in here.”

To contact the reporter on this story: Marcus Bensasson in Athens at mbensasson@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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