ECB's Preferred Inflation-Outlook Gauge Climbs to 5-Month High

  • Five-year, five-year forward rate rises from 2015 low
  • Rate is more than 40 basis points below its 10-year average

The outlook for consumer-price inflation in the euro area, as implied by European Central Bank’s preferred metric, rose to the highest level since July as data showed improvements in manufacturing output and the labor market.

The five-year, five-year forward break-even rate, which measures the outlook for inflation over the five-year period from 2020, rose to 1.83 percent Tuesday. That’s still below the average of 2.26 percent over the past decade. The measure fell to as low as 1.48 percent in January. ECB officials have said the rate is among key gauges they monitor. 

“A pick up in inflation expectations is a positive sign for Europe, where private and public debt is high,” said Fabrizio Fiorini, the chief investment officer at Aletti Gestielle SGR SpA in Milan. “The weak euro may add some more support. If this is sustained, we will probably see the first upward revision of ECB forecasts” in 2016, he said.

Unemployment in the 19-nation currency bloc fell to 10.7 percent in October, data from the European Union’s statistics office showed Tuesday. That’s the lowest rate since January 2012. The median estimate in a Bloomberg survey of economists was for an unchanged reading of 10.8 percent.

A separate report confirmed that a measure of manufacturing output in the euro region expanded last month at the fastest pace since April 2014. Markit Economics said that its Purchasing Managers Index for manufacturing rose to 52.8 in November from 52.3 a month earlier. A reading above 50 indicates growth.

While there are signs the euro area’s economy is slowly improving, both growth and headline inflation are subdued. Even after flooding 445 billion euros into the Eurosystem via public-sector debt purchases through Nov. 27, data released Monday showed consumer prices in Germany, the region’s largest economy, rose just 0.3 percent in November from a year ago. 

The ECB’s concern is that an expected pickup in prices in the coming months may only be temporary, eroding confidence in the central bank’s ability to meet its mandate and nurture a recovery. The recovery in the outlook for inflation may provide some confidence before policy makers meet on Dec. 3 to set interest rates amid speculation they will expand the stimulus program.

Draghi has put markets on notice for further stimulus, saying last month that the central bank will do what’s necessary to reach its inflation goal of just under 2 percent rapidly.

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