Eurozone inflation still well below ECB target
Underlying inflation in the eurozone rebounded in June, offering some comfort to the ECB, but still falling short of the improvement policymakers are hoping for.
With growth and price pressures easing throughout the year, ECB president Mario Draghi has already said that more policy easing will come in the near future unless inflation and growth prospects improve. Overall inflation held steady as expected at 1.2%, well short of the ECB’s target of almost 2%, but a closely watched “core” figure, excluding volatile food and energy prices, jumped to 1.2% from 1% in May.
While the core inflation rebound is impressive, it is in line with expectations and still below April’s reading, suggesting that overall price pressures are modest despite years of extraordinary stimulus from the ECB. The weak inflation has long puzzled policymakers.
The 19-country currency bloc has created over 10m jobs since the worst days of its debt crisis, and employment is the highest on record. Wages are also rising relatively quickly, creating the textbook environment for higher prices.
Yet inflation remains weak as businesses would rather sacrifice their own margins than jack up prices. The problem is that if prices failed to rise during the boom times, they are unlikely to do so during an economic slowdown.
Eurozone growth is seen at just 1.2% this year, less than half the 2017 figure, and a recent string of dismal indicators suggest this may yet turn out to be an optimistic estimate.
A key eurozone sentiment indicator published on Thursday underperformed expectations and Germany’s widely-watched IFO index also disappointed.
The figures only reinforced forced expectations that the ECB will cut interest rates either in July or September and lay the groundwork for restarting asset purchases.
Such support is bound to push borrowing costs even lower, but may fail to provide significant stimulus as bond yields are already near record levels.
