Euro-Area Inflation Rate Turned Positive Before Brexit Vote

  • Consumer prices rose annual 0.1% in June; median estimate 0%
  • Inflation returned to Germany while prices fell in Spain

Inflation unexpectedly returned to the euro area in June, suggesting that central-bank stimulus may have been starting to filter through to the economy before Britons chose to leave the European Union.

Consumer prices rose 0.1 percent from a year earlier, the European Union’s statistics office in Luxembourg said on Thursday. That’s the first increase since January and compares with a median estimate of unchanged prices, according to a Bloomberg survey of economists.

European Central Bank President Mario Draghi has been counting on a slow inflation pick-up in the second half as oil prices stabilize and the region continues its moderate recovery. Ahead of Britain’s vote to leave the EU, he expressed confidence that price growth in the region would return to the institution’s goal of just under 2 percent in the “not-too-distant” future.

That may now take longer to achieve despite the latest positive surprise as growth in the 19-nation economy is set to suffer in the wake of the U.K. referendum. Output may drop as much as 0.5 percent below previous projections over the next three years, Draghi told European leaders in Brussels.

Core Inflation

“Brexit could lead to lower growth in the euro area and that in turn may impact core inflation going forward,” says Nick Kounis, head of macroeconomic research at ABN Amro Bank NV in Amsterdam. “The ECB is looking at what happens to price developments over the medium-term, and with a more subdued trajectory of core inflation they may come to the conclusion that the headline rate will stay below target for longer than they had previously expected.”

The ECB currently forecasts inflation will average 0.2 percent this year before accelerating to 1.3 percent in 2017 and 1.6 percent in 2018. It sees growth at 1.6 percent in 2016 and 1.7 percent in each of the following two years. Core inflation accelerated to 0.9 percent in June from 0.8 percent in May, Eurostat said.

Policy makers already have deployed a raft of unconventional stimulus that includes large-scale asset purchases, negative interest rates and long-term loans that see banks getting paid for extending credit to companies and households. Still, inflation has undershot the ECB’s goal for more than three years.

Consumer prices declined an annual 0.9 percent in Spain., while the inflation rate in Germany rose to 0.2 percent, the highest since January, according to national reports.

The euro-area release follows data on Wednesday showing that economic confidence in the region weakened in June in anticipation of Britain’s referendum, even as sentiment improved in some countries with larger shares of trade with the U.K. like Germany and the Netherlands.

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