Euro-Area Inflation Slowdown Highlights ECB's Uphill Battle

Updated on
  • Rate fell to 1.3 percent in January from 1.4 percent
  • Consumer-price growth was likely damped by energy costs
Subdued Inflation Outlook Means ECB Can `Lean Back,' Berenberg Says

Inflation in the euro area slowed at the start of the year, highlighting the hurdles faced by the European Central Bank as it attempts to foster price growth in a region still beleaguered in places by high unemployment.

Consumer prices rose 1.3 percent in January, the European Union’s statistics office said on Wednesday. The reading exceeds the median forecast of 1.2 percent in a Bloomberg survey but is below December’s rate of 1.4 percent.

Just minutes before the report, Executive Board member Benoit Coeure said inflation would “only very gradually” converge to the ECB’s goal of close to but below 2 percent, justifying continued stimulus.

While economic growth in the 19-country region is at its strongest in a decade and joblessness has declined, price pressures have failed to pick up to a similar extent despite unprecedented efforts by the ECB. President Mario Draghi said last week that developments were still heavily reliant on monetary support, arguing that it’s too soon to discuss winding down asset purchases later this year.

In the euro area, the “labor-market recovery is still a few years behind other advanced economies like the U.S. and the U.K.,” said Jack Allen, an economist at Capital Economics in London. That means “domestic price pressures are going to build only very slowly, core inflation will rise only very slowly, so the ECB is going to be very cautious about normalizing monetary policy.”

Core inflation, which strips out volatile elements such as food and fuel, nudged up to 1 percent in January from 0.9 percent. That rate hasn’t been near 2 percent since 2008.

National inflation data ActualPriorEstimate
Germany1.4%1.6%1.6%
France1.5%1.2%1.1%
Spain0.7%1.2%0.8%
Italy (due Feb. 2)1.0%0.8%

Slack in the economy is one reason why price pressures have been slow to build. With unemployment still high in much of southern Europe, wages haven’t risen sufficiently yet.

The euro area’s unemployment rate stayed at 8.7 percent in December, a separate Eurostat release showed. Joblessness remains well above 10 percent in Spain and Greece.

Read more: Coeure Says Inflation to Converge Only Gradually Toward ECB Goal

Speaking in Dublin on Wednesday, Coeure confirmed Draghi’s assessment, saying that “an ample degree of monetary stimulus remains necessary for underlying inflation pressures to continue to build up” and that interest rates would remain at their present levels for an “extended” period, well past the end of the central bank’s net asset purchases.

What Our Economists Say...

“The decline in euro-area inflation largely reflected volatile energy prices. The rise in the core figure may also relate to forces beyond the ECB’s control. Service prices, the best measure of underlying price increases in the release, showed no change. As ECB President Mario Draghi said last week -- given the lack of movement, patience and persistence with monetary stimulus will be required.”

-- David Powell, Jamie Murray, Maxime Sbaihi, Bloomberg Economics

For more, see our Euro-Area React

Complicating matters for the ECB, the euro has risen to a three-year high against the dollar. Draghi has termed the development a “source of uncertainty,” while company executives were more blunt in expressing their concerns. 

Bill McDermott, chief executive officer of Walldorf, Germany-based SAP, said in an interview with Bloomberg Television’s Guy Johnson and Matt Miller earlier this week that the single currency’s gain is a headwind and “I would prefer it wasn’t as strong, for sure.”

As for stagnant wages, at least in Germany, where unemployment dropped to a fresh record low, signs are mounting that could finally change. Volkswagen this week offered employees two wage increases in stages of 3.5 percent and 2 percent. Labor union IG Metall, which represents 3.9 million members, is pushing for 6 percent more pay and prepared to stage walkouts that could aggravate production bottlenecks.

“We’re watching Germany very closely,” said Societe Generale economist Anatoli Annenkov. “It will matter for the ECB, at least you get an indication of what will happen eventually when slack in the labor market is exhausted.”

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