Euro zone inflation falls to 1.4%

Decline highlights challenges facing ECB as it winds down QE

January sales in Madrid: Energy, food, alcohol and tobacco prices were the main drivers of the decline in inflation last month. Photograph: EPA

January sales in Madrid: Energy, food, alcohol and tobacco prices were the main drivers of the decline in inflation last month. Photograph: EPA

 

Inflation in the euro zone slipped further away from the European Central Bank’s target in December, highlighting the challenge facing the bank as it looks to maintain price rises while winding down its quantitative easing programme this year.

Average consumer prices rose 1.4 per cent year on year in December, down from 1.5 per cent in November and in line with consensus forecasts.

Volatile energy, food, alcohol and tobacco prices were the main drivers of the decline, with inflation in services remaining steady and industrial goods picking up slightly.

Headline data

The ECB has made clear that it expects headline inflation to be weak in the coming months thanks largely to the impact of earlier rises in energy prices falling out of year-on-year calculations. However, Friday’s data showed core inflation also struggling to rise, remaining steady at 0.9 per cent.

However, separate data on factory gate prices provided one potential area for optimism. Producer price inflation over the month of November was twice as strong as expected, at 0.6 per cent, bringing the year on year rate to 2.8 per cent. PPI tracks changes in the prices of goods bought and sold by manufacturers, and can be used as an early gauge of inflationary pressures that may be passed on to consumers later.

– Copyright The Financial Times Limited 2018