Euro-Area Spell of Sub-Zero Inflation Ends as Unemployment Falls

  • Consumer prices were unchanged from previous year in October
  • Unemployment unexpectedly dropped to 10.8 percent in September

Euro-area consumer prices halted a decline in October as the European Central Bank stepped up preparations for more stimulus.

The region’s inflation rate rose to zero from minus 0.1 percent the previous month, a preliminary report by the European Union’s statistics office in Luxembourg showed on Friday. That’s in line with the median of 34 estimates in a Bloomberg survey. Unemployment decreased to 10.8 percent in September from a revised 10.9 percent, Eurostat said in a separate release.

ECB President Mario Draghi has all but promised to ease monetary policy in December. While he acknowledged that domestic demand remains resilient, concerns over a slowdown in emerging markets, a stronger euro and potential repercussions from a drop in oil prices continue to signal downside risks to the growth and inflation outlook.

“It’s an important number, given that Mr. Draghi indicated that both headline and medium-term expectations data are going to be key for the outcome of the next meeting,” said Frederic Pretet, inflation and rates strategist at Scotiabank Europe Plc in Paris. “Any stronger-than-expected inflation data reduces -- of course -- the possibility of seeing a cut in the deposit rate.”

Vigilance Warranted

In a bid to bring consumer price growth closer to its 2 percent goal, the ECB embarked on a 1.1 trillion-euro ($1.2 trillion) asset-purchase program in March. Six months later, the central bank forecast that inflation would accelerate to 1.7 percent in 2017. With risks increasing that those projections are too optimistic, ECB Executive Board Member Benoit Coeure has echoed Draghi in saying vigilance is warranted.

In the region, energy prices slumped 8.7 percent in October from the previous year. The bloc’s core inflation rate -- which excludes volatile elements such as food and energy -- rose to 1 percent this month, Eurostat said.

“The underlying inflationary impulse is not one that will in any way take the pressure off the ECB to act in December,” said Timo del Carpio, European economist at RBC Capital Markets in London.

Possible policy options include an extension of quantitative easing beyond its current end date of September 2016, ramping up monthly purchases from 60 billion euros and a cut to the deposit rate. 

In the past week, Governing Council members have expressed different views on whether more stimulus is needed. Vice President Vitor Constancio and Italy’s Ignazio Visco said on Wednesday that policy makers are ready to use all available instruments if needed. Their Estonian and Latvian colleagues argued against any imminent action.

With their toolbox almost empty, officials have pointed to euro-area governments to do their part. Despite changes to the labor code in countries such as Italy, the bloc’s unemployment rate is only slowly declining from its 2013 peak. The youth unemployment rate was 22.1 percent in September, Eurostat said.

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