Euro Area's Easter Inflation Blip Gives ECB Cause to Stay WaryBy
Core rate of price growth drops to 0.7%, weakest in 13 months
Easter timing was a factor, but ECB worries about confidence
A slowdown in euro-area inflation -- an Easter-related statistical blip that in normal years would be ignored -- could give the European Central Bank another reason to put off any decision on ending its bond-buying program.
Consumer-price growth unexpectedly weakened to 1.2 percent last month and the core rate, excluding volatile items such as food, was the lowest in more than a year at just 0.7 percent. Both measures were below most economists’ estimates.
The ECB and the European Commission each predict an upturn later this year, yet the concern is that the continued drip of feeble data combined with risks such as trade protectionism damage confidence so much that companies and households put off spending.
“The ECB will want to look at the next couple of months to assess to what extent this sharp drop in core inflation is temporary,” said Aline Schuiling, an economist at ABN Amro. “If we stay at these low levels, they might consider extending the purchases or having a longer taper.”
ECB chief economist Peter Praet, in the text of a speech delivered in Paris two hours after the inflation report, reiterated the central bank’s intention to wait while it judges whether the slowdown is short-term or not.
“The latest economic data and survey results have generally surprised to the downside, suggesting some loss of momentum in economic activity,” he said. “Temporary factors may also be at work. We will also need to monitor whether, and if so, to what extent, these developments reflect a more durable softening in demand.”
Praet noted that the euro-area economy has been expanding for five years, and that any slowdown needs to be judged against the exceptionally strong performance in 2017, when growth was the highest in a decade.
The European Commission likewise stuck to its relatively optimistic outlook in updated economic forecasts published Thursday, when it kept its inflation predictions unchanged. It sees price growth averaging 1.5 percent this year and 1.6 percent in 2019.
Bloomberg Economics said prices for airfares, restaurants and hotels were particularly hit by the timing of Easter, and that nascent wage pressure should lead to an improvement in inflation in coming months.
What Our Economists Say“The Easter effect won’t last long. We forecast an increase in the headline to 1.5 percent -- a move likely to be driven by transportation costs. Half of the increased contribution of 0.3 percentage point should come from a base effect linked to fuel prices and the other from airfare.”
-- David Powell and Jamie Murray, Bloomberg Economics. See their EURO-AREA REACT
Governing Council member Ardo Hansson echoed that view in testimony to the Estonian parliament, saying he sees “moderate wage-growth pressure” that will ultimately allow the central bank to exit its stimulus measures.
The euro, which dipped as low as $1.1965 after the report, recovered to $1.1972 at 1:16 p.m. Frankfurt time, up 0.2 percent on the day. The single currency was already near a four-month low.
ECB officials meeting last month to discuss how and when to ease back on the monetary accelerator, after years of interest-rate cuts and quantitative easing, agreed to wait until their June session to reassess the economic outlook. That suggests a decision on when to end bond-buying might not be taken until later in the summer.
President Mario Draghi maintained that the ECB is confident price growth will move toward its target of close to 2 percent in the medium term, but also acknowledged that inflation isn’t where policy makers would like.
“We think the ECB will see through this temporary (core) inflation dip and focus on the trend in underlying inflation pressures, and whether core inflation rebounds above 1 percent in May,” said Aila Mihr, an analyst at Danske Bank. “This will be crucial for the ECB to assess the next change in forward guidance.”
— With assistance by Andre Tartar, Kristian Siedenburg, Carolynn Look, Alessandro Speciale, and Ott Ummelas