Euro zone return to inflation confirmed as energy impact wanes

The euro zone economy returned to inflation in May, the European Union's statistics office Eurostat confirmed on Tuesday, as more expensive food, tobacco and services outweighed the impact of lower energy prices.

Eurostat said consumer prices in the 19 countries sharing the euro rose by 0.2 per cent month-on-month May for a 0.3 per cent year-on-year reading, confirming its earlier estimate. Prices in April had been flat.

Core inflation, which excludes the most volatile components of unprocessed food and energy, rose 0.1 per cent month-on-month for a 0.9 per cent year-on-year increase.

Eurostat said that in May, more expensive vegetables, restaurants and cafes and tobacco had the biggest upward impact on the overall year-on-year inflation value, while cheaper automotive fuel, heating oil and gas pulled the index down.

The European Central Bank wants to keep the headline measures of inflation at below, but close to 2 per cent year-on-year over the medium term.

Worried by a trend of falling prices, the bank started buying government bonds in March to inject more cash in to the economy and make prices rise again. Some in the market believe the return of inflation could persuade the ECB to cut short its quantitative easing (QE), although most ECB policymakers have said they plan to carry out QE in full.

The ECB expects euro zone inflation to rise to 1.5 per cent in 2016 and 1.8 per cent, about at its target, in 2017.

Reuters