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Home / Business / Inflation in the eurozone clearly exceeded expectations in May

Inflation in the eurozone clearly exceeded expectations in May



BRUSSELS / FRANKFURT (Reuters) – Inflation in the eurozone rose much more sharply than expected in May, giving relief to the European Central Bank following the turmoil that threatened the planned exit from a major stimulus package.

FILE PHOTO: General view of the skyline of the La Defense business district behind the Paris landmark of the Arc de Triomphe and the Champs Elysees Avenue, France, January 1
3, 2016. REUTERS / Charles Platiau / File photo

Inflation in the 19 countries , which shared the euro, rose from 1.2 percent in April to 1.9 percent, said the EU statistics office on Thursday. Expectations of a 1.6% increase were clearly exceeded as rising oil prices were quickly passed on to consumers.

Excluding volatile energy and unprocessed food prices, inflation stood at 1.3 percent, compared to 1.1 percent in April. Another core inflation measure, also excluding alcohol and tobacco, was 1.1 percent in May, compared to 0.7 percent in April.

The ECB's mandate to keep inflation below, but close to, 2% is a task that has proved difficult, with price pressures remaining stubbornly subdued, even over a decade of strong economic growth.

The ECB has spent months preparing investors for an end to its € 2.55 trillion ($ 3 trillion) bond purchase program.

Political crises in Italy and possibly Spain are threatening to revive the market turbulence on the country's peripheral countries and derail the bank's exit strategy.

Ten-year Italian yields IT10YT = RR rose to a four-year high this week, with yields also rising in Spain, Portugal and Greece. The ECB has already accumulated € 2 trillion in government bonds and will remain on the market until at least the end of September.

ING economists noted that the ECB's problem was not compounded by Thursday's data, as core inflation was still low and exposed to possible economic shocks as a threat of trade war with the United States and political uncertainty.

"After years in which the inflation rate had risen to just under 2 percent, it could not have been more difficult," ING wrote to customers.

But policymakers have long argued that the Bank's mandate is to oversee inflation, not help countries out of trouble, and have little appetite for policy normalization plans.

ECB board members Benoit Coeure and Sabine Lautenschlaeger have filed charges in recent days to end bond purchases this year, and Thursday's data is likely to support their case.

While policymakers tend to override oil price shocks, some of them privately argue that inflation could compound their case in the coming months, even if they know that the increase is temporary and the actual inflation picture is more benign ,

The ECB will be at its next meeting on 14 June when it publishes new economic forecasts, but a decision on whether asset purchases should be phased out will be at the meeting on 26 July.

While investors, after a brief taper, almost unanimously expect the ECB to end bond purchases by December, forecasts for the Bank's first rate hike in recent weeks have shifted sharply from about April to probably September.

Eurostat's first inflation estimate contains no previous month's information.

In a separate release, Euros did say that unemployment in the eurozone fell to 8.5 percent in April, after having been revised up by 8.6 percent in March. A Reuters survey of economists had expected a decline to 8.4 percent on average.

Reporting by Robert-Jan Bartunek; Arrangement by Philip Blenkinsop and John Stonestreet


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