Euro-Area Inflation Stuck Close to Zero May Pressure ECB

Updated on
  • Consumer prices increased annual 0.2 percent in December
  • Economists in survey predicted acceleration to 0.3 percent

Draghi's Dilemma: Euro-Area Inflation Stuck Near Zero

Euro-area inflation was weaker than economists predicted in December, when the European Central Bank stepped up its stimulus program.

Consumer prices rose an annual 0.2 percent, the European Union’s statistics office said on Tuesday. That compares with a median estimate for a 0.3 percent increase, according to a Bloomberg survey of economists. Italian inflation unexpectedly slowed to 0.1 percent, compared with a forecast for a pickup to 0.4 percent.

“It’s a major disappointment,” Jane Foley, a foreign-exchange strategist at Rabobank in London, said on Bloomberg TV. “We’ve seen this story again and again. Despite very weak monetary conditions, inflation is refusing to budge.”

The euro was little changed after the report and traded at $1.0776 at 11:48 a.m. Frankfurt time.

Even though ECB officials have for months been trying to boost price pressure with unconventional policies such as negative interest rates and large-scale asset purchases, their medium-term inflation goal of just under 2 percent is moving further into the distance. What was billed as a slight gain in the headline rate due to mechanical ‘base effects’ at the turn of the year may not materialize due to a renewed drop in crude-oil costs.

Brent crude ended 2015 with the lowest annual average price in 11 years as the largest members of the Organization of Petroleum Exporting Countries keep pumping near record levels. At $37 a barrel, oil is much cheaper than the ECB anticipated in December, when it predicted inflation would average 1 percent this year and 1.6 percent in 2017.

“The ECB will not like these inflation numbers,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. “With inflation way below target and the ECB’s easing bias, further easing cannot be ruled out.”

ECB policy makers in Frankfurt expanded stimulus late last year by cutting the deposit rate to minus 0.3 percent and extending the duration of large-scale asset purchases. While President Mario Draghi said in a speech in New York that he will secure a return of inflation to 2 percent “without undue delay,” he conceded that an addition to the now 1.5 trillion-euro ($1.6 trillion) quantitative-easing program could still be needed.

Core inflation, which strips out items with volatile prices such as fuel, remained at 0.9 percent in December, Eurostat said. Energy costs decreased an annual 5.9 percent.

On Monday, the German statistics office said inflation in Europe’s largest economy was 0.3 percent, missing economist estimates for an increase to 0.4 percent.

— With assistance by Kristian Siedenburg, Francine Lacqua, and Maria Tadeo

(Updates with comment from economist in seventh paragraph.)
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