Euro-Area Inflation Slows More Than Forecast Before ECB Meeting

  • Price growth slows to 1.4%, below 1.5% median estimate
  • ECB Governing Council prepares for June 8 gathering in Tallinn

Why the ECB Isn’t Concerned With Slow May Inflation

Euro-area inflation slowed more than economists forecast, giving ammunition for European Central Bank policy makers who say it’s too early to commit to an exit from monetary stimulus.

Consumer-price growth decelerated to 1.4 percent in May -- the weakest reading this year -- from 1.9 percent a month earlier, Eurostat said on Wednesday. A measure that strips out volatile components such as energy and food fell to 0.9 percent, also weaker than expected. In a separate release, the European Union’s statistics office said unemployment declined to 9.3 percent, its lowest level since March 2009.

ECB President Mario Draghi has tried to downplay expectations that the Governing Council will do much more than acknowledge the latest economic progress -- let alone put the ECB on an exit course -- at its meeting next week in Tallinn. Actual proof that price trends remain weak should help him hammer home the message that the central bank has to remain patient and quell the urge of some of his colleagues to take more decisive steps.

Draghi told EU lawmakers May 29 that the economy still needs support.

Source: Bloomberg

“More subdued inflation will help Draghi make the case that the exit can be slow,” said Nick Kounis, an economist at ABN Amro Bank NV in Amsterdam. “At the same time, they need to keep the momentum in this discussion going without letting markets run ahead of themselves so it’s a very fine balancing act.”

While sentiment indicators have signaled strong economic momentum, consumer prices continue to lag the recovery. Inflation slowed more than anticipated in at least three major euro-area economies.


ActualForecast
Germany1.4%1.5%
France0.9%1.1%
Spain2.0%2.1%

IHS Markit, which publishes a monthly activity index, last week captured the disconnect between weak price growth and a strengthening economy where companies are stepping up hiring to meet demand. Growth -- envisaged to clock in at as much as 0.7 percent in the second quarter -- is consistent with tighter monetary policy, it argued, if it wasn’t for weakening inflation.

Draghi stressed on Monday in Brussels that “downside risks to the growth outlook are further diminishing,” highlighting one of the key signals that the ECB could send next week. Some policy makers have said they now consider risks to the economy’s outlook as broadly balanced.

Gradual Approach

Executive Board member Benoit Coeure warned earlier this month that “too much gradualism” in adjusting the ECB’s policy stance bears the risk of larger market adjustments once decisions are finally taken, while defending the current plan to finish QE before raising rates. 

Bundesbank President Jens Weidmann, one of the fiercest critics of the central bank’s asset-purchase program, has argued that questions about the timing of an exit are legitimate, even though he noted that an expansionary stance “continues to be appropriate in principle.”

The comments suggest that next week’s meeting may only yield minor changes to policy communication, such as the removal of an explicit pledge to cut rates further if needed or the recognition that risks to the recovery are no longer skewed to the downside.

“Draghi and others stressed that the most important argument for not considering an exit so far is that despite the surprisingly strong economy there were no signs of inflation rising on a sustained basis,” said Michael Schubert, an economist at Commerzbank AG in Frankfurt. “On balance, we are assuming that at next Thursday’s meeting the ECB will retreat in part but not entirely from its easing bias.”

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