Euro-Area Inflation Slows as Draghi Urges Prudence in Exit

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  • Euro-Area Inflation Slows as Draghi Urges Prudence in Exit

Euro-area inflation slowed in June even as underlying price pressures picked up, backing the European Central Bank’s call for a prudent approach toward policy normalization.

Consumer prices rose an annual 1.3 percent in June — more than economists predicted — after increasing 1.4 percent the previous month, according to a flash reading by Eurostat on Friday. The core rate, which strips out volatile components such as energy and food, increased to 1.1 percent from 0.9 percent in May, also exceeding estimates.

The pickup in underlying inflation is encouraging for ECB President Mario Draghi and his fellow Governing Council members who want to see proof that price growth can be sustained at their goal of below but close to 2 percent without central-bank support. So far, the strengthening recovery and economic confidence at the highest level in a decade have only had a muted effect — the main reason why policy makers insist that an exit from unconventional measures must be gradual, if not very gradual.

“Although headline inflation came in higher than expected, today’s release confirms that inflationary pressures remain subdued in the euro zone,” said Julien Lafargue, European equities strategist at JP Morgan Private Bank in London. “The ECB is still not in a hurry. Yet the macroeconomic momentum remains supportive and core inflation is gradually recovering. As such the direction of travel for rates, however gradual it may be, is likely higher.”

The euro was little changed after the report and traded at $1.1398 at 11:26 a.m. Frankfurt time.

The pick-up in underlying price pressures was primarily driven by higher services charges in Germany, according to Tuuli Koivu, senior analyst at Nordea in Helsinki. As those have proved volatile in recent months, it’s too soon to gauge whether the increase is the beginning of more pronounced trend, she said.

Spooked Investors

The ECB is mulling phasing out its 2.3 trillion-euro ($2.6 trillion) quantitative-easing program that is currently scheduled to run until at least the end of the year. In a taste of just how delicate communicating the withdrawal of monetary support will be, Draghi sparked a rally in the euro and bond yields this week when he argued that the central bank could scale back purchases without tightening policy. Investors misjudged the comments, which were meant to send a balanced message, according to people familiar with the matter.

Earlier on Friday, French data showed inflation slowed to 0.8 percent June, after reports on Thursday revealed price growth slowed less than anticipated in Spain and unexpectedly picked up in Germany. In Italy, the worst-performing of the euro area’s largest economies, inflation came in weaker than forecast this month.

The 19-nation region recorded its fastest expansion in six years in the second quarter, according to IHS Markit’s gauge of activity in the manufacturing and services sectors. Even though momentum slowed this month, growth likely accelerated to 0.7 percent in the April-June period.

For Draghi, a strong economic performance may mean that investors will keep looking closely for any signal on tapering, adding to the complexity of managing a very gradual return toward more normal monetary policy after for years of bond-buying and negative rates.

“I believe, as all my colleagues in the Governing Council, that in principle an expansive monetary policy is currently appropriate,” ECB Governing Council member Jens Weidmann said on Thursday. “However, there can be different opinions about the right degree of monetary-policy accommodation.”

About the Author

Samed Olukoya
CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and, with over a decade long experience in the global financial market. Contact Samed on Twitter: @sameolukoya; Email: [email protected]

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