Euro zone inflation’s rise is a mixed bag for ECB

Consumer inflation picked up to 1.5% in February

Underlying inflation, closely watched by the ECB, failed to rise. Photograph: iStock

Underlying inflation, closely watched by the ECB, failed to rise. Photograph: iStock

 

Euro zone inflation inched up last month, Eurostat said on Friday, mild comfort for the European Central Bank as it prepares fresh measures to mitigate an unexpectedly deep and long economic slowdown.

Consumer inflation in the 19 countries sharing the euro picked up to 1.5 per cent in February, as expected, from 1.4 per cent in January, as food and energy costs continued to rise.

But underlying inflation, closely watched by the ECB, failed to rise. Price growth excluding food and energy held steady at 1.2 per cent, short of the central bank’s overall inflation target of almost 2 per cent.

This may be especially concerning for the ECB, because it has long predicted a pick-up in core inflation. The weak readings suggest a poor understanding of how inflation dynamics changed after the euro zone’s debt crisis.

They also give the ECB yet another reason to delay removing any further stimulus, especially since the bloc’s growth weakness points to a dire need of more support, not less.

Indeed, the ECB, which just ended a €2.6 trillion bond-buying scheme aimed at pushing down borrowing costs, is already contemplating new support measures, with the first possibly coming at its next policy meeting, on March 7th.

Wanting to combat a slowdown in bank lending, the ECB is likely to signal more long-term loans to banks, in the hope of maintaining the flow of credit and investments.

While the bank continues to signal for steady rates only through the summer, few believe rates will rise this year. Markets have already moved their expectations for an increase to mid-2020.

In a separate release, Eurostat reported the euro zone’s unemployment rate was 7.8 per cent in January, unchanged from a revised figure a month earlier, although 23,000 fewer people were unemployed than in December.

The 7.8 per cent reading was the lowest since October 2008. December’s number had previously been estimated at 7.9 per cent. – Reuters