German Inflation Slows More Than Forecast as ECB Meeting Nears

  • Rate dropped to 1.4% in May as Easter effect unwound
  • ECB officials debating how and when to begin stimulus exit

German inflation slowed in May, underpinning recent comments from European Central Bank officials that the 19-nation bloc still needs extraordinary monetary stimulus.

The rate dropped to 1.4 percent in May from 2 percent in April, sharper than the decline to 1.5 percent predicted in a Bloomberg survey. Inflation in the euro area, due Wednesday, is forecast to have cooled to 1.5 percent, though the German data means there’s now a risk of a weaker reading.

While inflation rates have risen sharply across the continent since late last year, policy makers have cautioned that increases are driven largely by energy costs and not yet self-sustained. 

Still, with the economy growing solidly, speculation has mounted among investors about how the ECB’s stimulus efforts will eventually be unwound. Reuters reported on Tuesday that officials are ready to drop a reference to downside risks at their June 8 meeting and start using “largely balanced.”

“Today’s German inflation data should take further pressure off the ECB to wind down its monetary stimulus,” said Carsten Brzeski, chief economist at ING Diba AG in Frankfurt. It “actually shows that the current cyclical upswing in the euro zone does not yet coincide with a pick-up in inflation.”

Euro-area consumer-price growth probably decelerated to 1.5 percent this month from 1.9 percent in April, economists predicted in a separate survey before a report on Wednesday. Spain’s inflation rate fell more than forecast in May, dropping to 2 percent from 2.6 percent.

At Barclays, economists have a below-consensus forecast of 1.4 percent for the euro area and said earlier on Tuesday they even see downside risks to that number. A reading below 1.5 percent would be the weakest so far of 2017.

Dovish Draghi

The ECB’s Governing Council will gather in Tallinn next week for one of its regular out-of-Frankfurt meetings. ECB President Mario Draghi has tried to downplay expectations of a major shift, and used an appearance in European Parliament on Monday to argue that accommodative policy -- negative interest rates and a 2.3 trillion-euro ($2.6 trillion) asset-purchase program -- must be maintained.

“Domestic cost pressures, notably from wages, are still insufficient to support a durable and self-sustaining convergence of inflation toward our medium-term objective,” he said.

Bundesbank President Jens Weidmann said in Berlin on Monday that “in light of subdued price pressures, an expansionary monetary policy continues to be appropriate in principle. But given the continued economic recovery and a -- by all forecasts predicted -- inflation rate of just below 2 percent in the year 2019, it is indeed legitimate to ask when the ECB council should consider a monetary-policy normalization.”

The ECB currently predicts inflation will accelerate to 1.7 percent in 2019. It update those projections after next week’s meeting.

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