Elusive Inflation Amid Faster Growth Makes ECB Task More Complex

  • EU Commission lifts growth outlook as inflation forecast cut
  • Projections back Draghi stance it’s too early to exit stimulus

For all the brightening economic prospects in the euro area, inflation remains elusive.

With political risks receding following France’s election of a centrist president, a firming and broadening recovery in the 19-nation currency bloc is adding pressure on the European Central Bank to outline an exit from years of extraordinary monetary stimulus. Mario Draghi and other policy makers have responded that -- so far -- strengthening momentum has shown little sign of translating into faster inflation.

Updated forecasts published by the European Commission on Thursday underpin their caution. While the outlook for economic output was upgraded slightly, consumer prices are expected to rise more slowly.

“Inflation is picking up, but core inflation is not moving a lot,” European Union Commissioner for Economic Affairs Pierre Moscovici told reporters in Brussels. “It’s not up to me, but also up to the ECB, to draw conclusions out of that.”

The fresh projections come just days after the French chose pro-euro Emmanuel Macron as their new leader over nationalist Marine Le Pen. The election outcome, which follows a defeat of anti-EU candidate Geert Wilders in the Netherlands earlier this year, may prove a boon for the euro region, where political uncertainty has damped spending and investment.

“As this forecast goes to press, the tide of populist ideas in Europe may have turned,” Marco Buti, the commission’s chief economist, said in the report.

The EU’s executive arm sees the 19-nation economy expanding 1.7 percent this year -- up from 1.6 percent forecast in February -- and 1.8 percent in 2018 as domestic risks have given way to external ones. At the same time, the forecast for inflation was cut to 1.6 percent in 2017 and 1.3 percent in 2018 -- down from 1.7 percent and 1.4 percent, respectively.

On the face of it, these numbers would give the ECB little room to scale down asset purchases and lift interest rates. The central bank’s own forecasts are slightly more optimistic though, and a debate about policy normalization has been heating up, highlighting differing opinions among policy makers.

Risk Balance

Executive Board member Benoit Coeure argued last month that risks to the region’s economic outlook are “by and large balanced,” a testimony that -- if adopted by the Governing Council -- would mark the first step toward unwinding stimulus. His colleague Yves Mersch has signaled that he might not need much to be convinced, while Draghi and the ECB’s chief economist, Peter Praet, continue to stress that risks remain to the downside, even if they have diminished.

But the key condition for removing policy support -- a self-sustained pickup in prices -- is nowhere in sight. According to the Commission, inflation will be largely driven by energy costs, “rather than by a durable and self-sustained momentum.”

Even though unemployment is falling -- the Commission sees it declining faster than previously expected, to 9.4 percent this year and 8.9 percent in 2018 -- wages haven’t started to rise. Even in Germany, where joblessness is at an all-time low, their pickup has been slow at best.

For Praet, not all hope is lost. “Over the next couple of years, the pressure on wages should start to feed into inflation,” he told Trends magazine of Belgium in an interview published Thursday.

As for Draghi, he told Dutch lawmakers pressing him for a commitment on unwinding stimulus that it was too early to declare success.

“Is it time to exit? Or is it time to start thinking about exit or not?” he said Wednesday. “The assessment of the Governing Council is that this time hasn’t come yet.”

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