Draghi Set for Inflation Boost That May Not Be All He Needsby and
Oil-driven price gains mask still-weak underlying pressure
Faster inflation could make stimulus decisions more difficult
Mario Draghi is set to get a bigger taste of inflation, just not in his preferred flavor.
Rising oil prices and a weaker euro mean that projections the European Central Bank president released less than a month ago could be revised higher in 2017. While that’s good news for policy makers who haven’t met their inflation goal in almost four years, it’s also likely to mask continued weakness in the domestic economy.
Faster consumer-price gains could widen divisions in the ECB’s Governing Council as some officials push for a gradual exit from monetary stimulus and others argue that the upturn is still too frail, especially with political events carrying the potential to hit confidence. After policy makers agreed on Dec. 8 to extend their bond-buying program, albeit at a slower pace, Draghi warned that “uncertainty prevails everywhere” and said purchases will be stepped up if needed.
“There is a difficulty in making forecasts with that high a level of uncertainty because the biggest risks are probably still of a political caliber,” said Anatoli Annenkov, a senior economist at Societe Generale SA in London. “In that sense, it is probably wise for the ECB to take a quite measured approach on the inflation outlook.”
Large-scale bond purchases that started in March 2015 are now scheduled to run until at least the end of 2017, with the monthly pace dropping to 60 billion euros ($63 billion) in April from the current 80 billion euros.
That means they’ll extend through elections in the Netherlands, France and Germany, as well as possible polls in Italy and Greece, all of which could see populist and anti-euro parties gaining ground. Talks on the U.K.’s exit from the European Union and the start of Donald Trump’s presidency in the U.S. add to the risks, backing Draghi’s call for caution.
Yet at the same time, rising energy costs look set to push up the headline rate of inflation. Brent crude has surged more than 25 percent since mid-November, in part due to an agreement by the Organization of Petroleum Exporting Countries to curb production for the first time in eight years. It was up 0.2 percent at $56.98 a barrel at 10:35 a.m. London time on Friday.
Those recent gains aren’t taken into account by ECB forecasts that projected consumer-price growth at 1.3 percent in 2017, and accelerating to 1.7 percent in 2019 -- not far below the goal of just-under 2 percent.
Figures due on Jan. 4 will probably show inflation jumped to 1 percent in December from 0.6 percent in November, according to a Bloomberg survey of economists.
“Stabilization or a rise in energy prices mean that a significant increase in inflation rates can be expected for 2017,” ECB Governing Council member Ewald Nowotny said in a statement published by the Austrian central bank on Friday. “Admittedly though, at a European as well as at the Austrian level, the expected inflation development for 2017 is still below the ECB’s stability goal. For that reason expansive monetary policy is still to be expected -- but not for ever.”
Any sign that the ECB’s price-stability target is in sight could spur more-hawkish members of the Governing Council to call for an end to quantitative easing. Bundesbank President Jens Weidmann said in an interview with German newspaper Bild published on Dec. 26 that waiting until 2019 to tighten policy “would be too late.”
“We must act in a forward-looking way,” he said. “That means pulling on the reins as soon as inflation is deemed to be on a sustainable path toward our goal.”
The pivotal point is likely to be the definition of “sustainable.” The Governing Council has lamented the lack of a convincing upward trend in core inflation, the measure that strips out volatile items such as food and energy. That rate hasn’t risen since June, and the Bloomberg survey shows it was probably unchanged at 0.8 percent in December. With unemployment barely below 10 percent and wage growth lackluster, there’s little pressure for it to pick up.
One further risk for the euro area -- a net importer of energy -- is that more-expensive oil actually dampens economic growth.
“There is no question that these higher prices will feed into higher headline inflation,” Draghi said after the ECB’s last policy meeting. “We have to see to what extent this is a one-off effect, to what extent it will have secondary effects, and to what extent this will affect inflation excluding energy, which we are not seeing yet.”
That unknown impact, and the need to see how the economy fares in a potentially turbulent year of politics, could keep Draghi and most of his colleagues wary in 2017. The next decision is scheduled for Jan. 19 in Frankfurt.
“The ECB is likely to lean against any hawkish shift that higher headline inflation might otherwise imply, and keep a very cautious stance throughout the first half of next year,” said Frederik Ducrozet, senior economist at Banque Pictet & Cie SA in Geneva. “One justification -- or excuse -- they could use is indeed related to political uncertainty ahead of major elections.”