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09/12/2016

Eurozone price inflation hits trough in May

Euro & Finance

Eurozone price inflation hits trough in May

Eurozone inflation has slowed. [www.TheEnvironmentalBlog.org/Flickr]

A further slowdown in eurozone inflation in May was confirmed on Monday (16 June), as the cost of telecommunication and food kept prices low, confirming a problem that the European Central Bank recently sought to stem.

Consumer prices in 18 countries using the euro rose by 0.5% on the year in May, keeping them in the “danger zone” of below 1%, the EU’s statistics office Eurostat data said.

Prices fell by 0.1% on the month in May, with the cost of services down by 0.2% when compared with April.

It confirms a problematic pricing trend that weighs on debt-strapped countries, and recently prompted the European Central Bank to act.

In June, the ECB became the first major central bank to introduce negative deposit rates – charging banks to park funds overnight. It also launched ultra-cheap four-year loans to banks, in order to boost lending to companies.

>> Read: ECB cuts rates below zero to boost recovery in the eurozone

ECB President Mario Draghi said he was ready to act again, leaving investors guessing as to when he could start buying assets such as bonds – a measure known as quantitative easing.

Executive Board member Benoit Coeure said on Friday there was no need to launch large-scale asset purchases for now because the eurozone is not seeing deflation.

There are, however, three eurozone countries experiencing price deflation.

Consumer prices in Greece were down in May by 2.1% compared to a year earlier after a 1.6% drop in April. The annual rate of inflation in Portugal was -0.3% in May. In Cyprus, it stood at -0.1%.

With 12-month average annual inflation rate in the eurozone at 0.9% in May, only Luxembourg, Austria, Slovenia and Finland had an annual inflation rate of 1% or more.

Core inflation, excluding energy, food, alcohol and tobacco, fell to 0.7% in May from 1% in April. Energy prices were flat on the year.

The ECB recently lowered its forecast for eurozone inflation in June, predicting that it would reach 1.4% in 2016 – far off its target of just below 2%.

Background

A slowdown in the eurozone's economic recovery in the first quarter reinforced calls for bold actions by the European Central Bank. The eurozone economy expanded by just 0.2% in the three months to March, the EU's statistics office Eurostat said.

Euro zone inflation has been stuck in the European Central Bank's 'danger zone' of below 1% since October and coupled with weak growth poses a risk for the recovery.