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Euro Inflation at Lowest in Over 4 Years Misses Estimates

A Euro Sign Sculpture Sits Outside the ECB in Frankfurt
The stars of European Union membership sit on a euro sign sculpture outside the headquarters of the European Central Bank in Frankfurt. The Frankfurt-based central bank forecasts an inflation rate of 1 percent this year and 1.3 percent in 2015, well below its medium-term objective. Photographer: Ralph Orlowski/Bloomberg

Euro-area inflation slowed in March by more than economists forecast to the lowest level in over four years, keeping pressure on the European Central Bank to take action to foster the currency bloc’s recovery.

Consumer prices grew 0.5 percent in the year, after a 0.7 percent gain in February, the European Union’s statistics office in Luxembourg said today. That missed the 0.6 percent median forecast in a Bloomberg News 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.

Today’s result is half of the ECB’s forecast for 2014 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 policy makers meet on April 3 in Frankfurt. The rest expects 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,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London. “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.”

ETF Inflows

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

The euro advanced against the dollar, rising 0.4 percent to $1.3801 at 4:53 p.m. in Brussels.

International investors are returning to the euro, including to nations that received bailouts in the depths of the crisis. U.S. exchange-traded funds show net inflows of $634 million into Spain this year, marking an increase of 71 percent, according to data compiled by Bloomberg. Flows into Greece have increased 77 percent to $102 million.

Energy prices fell 2.1 percent in March after a 2.3 percent decline in February, today’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.

Record Unemployment

The core inflation rate, which excludes volatile items such as energy, food, alcohol and tobacco, advanced 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 in March. Yet the currency bloc remains dogged by near-record unemployment and anemic 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 Oesterreich newspaper in interview published today. “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 March 29 that the recovery will 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,” Weidmann said.

Today’s inflation data are estimates. The statistics office will release final figures for March on April 16.

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