Euro-Area Inflation Holding at 0.8% Eases Pressure on ECB

The euro-area inflation rate exceeded economists’ forecasts in February, easing pressure on the European Central Bank to take action next week to foster the fragile economic recovery.

Consumer prices grew an annual 0.8 percent, the same pace as in the previous two months, the European Union’s statistics office in Luxembourg said today. The median estimate in a Bloomberg News survey of 41 economists was for the rate to fall to 0.7 percent. In January, the unemployment rate held at a near-record 12 percent, Eurostat said in a separate report.

The inflation number “shows that there is no threat of fully fledged deflation,” Carsten Brzeski, an economist at ING Group NV in Brussels, said by telephone. “The situation has not worsened, which also means right now that there’s no imminent reason for the ECB to act again.”

The euro extended gains against the dollar after today’s data were released, as investors welcomed signs that the economic situation in the currency bloc is stabilizing. The economy has now expanded for three straight quarters after a record-long recession, and the European Commission this week raised its growth forecasts for 2014 and 2015.

Draghi on Feb. 6 put investors on a month’s notice for further economic stimulus, saying the Frankfurt-based central bank needed “to get more information” on the recovery before making any decision. “We are willing and we are ready to act,” Draghi said after the ECB held its benchmark interest rate at a record-low 0.25 percent.

‘Downward Pressure’

Energy prices fell 2.2 percent after a 1.2 percent decline in January, today’s report showed. “In recent times, energy price developments in particular put downward pressure on headline inflation, a phenomenon that has contributed to weaker inflation at the global level,” Draghi said yesterday.

The core inflation rate, which excludes volatile items such as energy, food, alcohol and tobacco, rose 1 percent. Today’s inflation data are estimates. The statistics office will release final figures for February on March 17. The ECB announces its next rate decisions on March 6.

Still, inflation has been less than half the ECB’s ceiling for five months, and exceeding the median forecast by 1/10 of a point is “nothing to get excited about by any stretch of the imagination,” said Christopher Matthies, an economist at Sparkasse Suedholstein, in Neumuenster, Germany, who correctly predicted the rate in Bloomberg’s survey.

‘Slight Increase’

“It’s pretty depressing that we feel a little bit relieved by this kind of slight increase, because in fact the deviation from the ECB’s target rate is still huge,” he said.

The unemployment rate, which has been stable since October, conceals extreme regional differences, with Spain at 25.8 percent in January and Austria at 4.9 percent. In Germany, the euro zone’s biggest economy, the rate stood at 5 percent, down from 5.1 percent in December.

Joblessness among people under the age of 25 held at 24 percent in January, today’s report showed, with 54.6 percent of young Spaniards out of work.

Draghi said on Feb. 6 that “although unemployment in the euro area is stabilizing, it remains high,” and called on governments to “continue with product and labor-market reforms” that will help to “enhance the euro area’s growth potential and reduce the high unemployment rates in many countries.”

Yet while unemployment remains elevated and the euro-zone recovery is still fragile, “the stable headline inflation reading coupled with the ongoing signs of economic recovery provide an argument for the ECB to keep their powder dry next week,” said Martin van Vliet, an economist at ING Bank in Amsterdam.

“To be sure, if the ECB decides to ease policy anyway, it will probably merely consist of a small refi-rate cut,” he said. “The deposit rate would likely stay at zero.”

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