Zero Inflation Looms for ECB as Oil Drop Counters Stimulus

European Central Bank President Mario Draghi

European Central Bank President Mario Draghi

Photographer: Martin Leissl/Bloomberg
  • Economists see inflation at five-month low in September
  • Data may reinforce calls to expand euro-area stimulus

If the euro area is about to run out of inflation -- again -- it won’t shock Mario Draghi.

The European Central Bank president said more than three weeks ago that the inflation rate could turn negative this year because of the renewed decline in oil prices. The 19-nation region is set to take a step in that direction on Wednesday, when data will show consumer prices stagnated in September for the first time in five months, according to a Bloomberg survey of economists.

Stalled prices would mark a setback for policy makers who have been trying to steer inflation back toward 2 percent for the better part of two years, and may spark a new debate about deflation risks. Yet while officials have repeatedly stressed that they’re prepared to add stimulus if needed, they’ve also said they want more evidence before making a decision.

“The figures this month are unlikely to prompt any action from the ECB,” said Ben May, an economist at Oxford Economics Ltd. in London. “Quantitative easing has prevented the emergence of second-round effects from the new decline in oil prices and the pickup in core inflation in recent months is a cause for comfort. Some people may be concerned by this new fall in inflation, but the ECB has tried to distance itself from these concerns.”

The European Union’s statistics office will publish September inflation data on Wednesday at 11 a.m. in Luxembourg. Estimates in the Bloomberg survey range from 0.3 percent to minus 0.2 percent. Eurostat will release unemployment data for August at the same time, and the European Commission will issue its latest report on economic confidence on Tuesday.

Oil prices have fallen more than 24 percent since the end of June, and a barrel of crude now costs half what it did a year ago. Prices slid again Monday after China reported a drop in industrial profits, signaling demand may be weakening in the world’s second-biggest consumer. Brent crude was down 1.3 percent at $47.97 a barrel at 12:23 p.m. Frankfurt time.

In the euro area, the decline in energy costs has boosted disposable income, underpinned consumer confidence that is already benefiting from slowly receding unemployment, and turned domestic demand into a key driver of the region’s economic recovery.

At the same time, it has made the ECB’s job more complicated.

Stimulus Survey

Draghi acknowledges that while the central bank’s 1.1 trillion euro ($1.2 trillion) asset-purchase program is working, the revival in inflation has been slower and weaker than initially anticipated. In September, the ECB cut its outlook for prices and economic growth through 2017.

The revisions, and the risk of more-protracted global economic weakness as a consequence of a slowdown in emerging markets, have prompted speculation that the central bank will add stimulus. Two thirds of economists in a Bloomberg survey this month said the ECB will step up its QE program, with a majority of those who gave a timeframe predicting the move will come before the end of the year.

“We may see negative numbers of inflation in the coming months. Is that deflation? The Governing Council tends to think that these are transitory effects, mostly due to oil-price effects,” Draghi said at a press conference on Sept. 3, after the ECB kept interest rates at record lows. “We will closely monitor all incoming information, and the Governing Council wanted to emphasize in the discussion we had today its willingness to act, its readiness to act, and its capacity to act.”

‘Extraordinary Elements’

Policy makers have taken some comfort from core inflation, which strips out volatile elements such energy and food prices. After falling as low as 0.6 percent in January, the rate rose to 1 percent in July. Economists predict it stood at 0.9 percent in September, unchanged from the previous month.

“If you look at core inflation rates, they have been rather stable,” ECB Governing Council member Ewald Nowotny said in an interview with Bloomberg Television on Sept. 23. “In that sense, one has to see there are some extraordinary elements that might have a strong influence for this month and the coming months.”

Nowotny, who also heads the Austrian central bank, said he’d be wary of increasing central-bank stimulus any time soon, adding that a more thorough examination of incoming data is needed. His Lithuanian counterpart, Vitas Vasiliauskas, told Bloomberg on Sept. 24 that a discussion on expanding QE should take place no earlier than December, when the ECB will publish new economic projections.

Executive Board member Sabine Lautenschlaeger said on Monday it was still “too early” to talk about concrete measures for broadening asset purchases.

“We have to look through recent volatility to see whether economic underlying factors have changed, and that I do not see,” she told reporters in Milan. “The basic scenario is still intact with regard to a modest recovery.”

Even so, policy makers have often warned of the risk of inflation staying low for too long. A fall in energy prices, though temporary, might spark knock-on effects in the rest of the economy.

“Inflation is mostly that low because of energy prices, which central bankers usually look through,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “The ECB’s situation is different because inflation will remain low. They’re concerned about their credibility and that inflation expectations become dislodged.”

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