Euro zone inflation slightly exceeds forecasts in August

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August annual inflation at 0.4 pct, unchanged from July

  • Reuters

Brussels: An increase in rents and car-repair prices lifted euro zone inflation in August slightly higher than a first estimate, a small piece of good news for the European Central Bank but not one that radically changes the economic outlook.

Consumer inflation in the 18 countries sharing the euro rose 0.1 per cent month-on-month in August for a 0.4 per cent year-on-year increase, the EU’s statistics office Eurostat said on Wednesday, revising upwards its initial estimate, from August 29, of a 0.3 per cent annual gain.

That leaves the inflation rate unchanged from July.

“Every positive surprise is welcome in terms of market psychology and for the European Central Bank,” said Frederik Ducrozet, an economist at Credit Agricole.

“But it is far from the kind of shift you need to rule out QE,” he said, referring to quantitative easing, the programme of bond purchases the United States and Britain have used to lift their economies.

Eurostat said that rising rents, higher prices in cafés and restaurants and more expensive car repairs did the most to raise year-on-year inflation. Cheaper fuel, fruit and phone calls pulled it down the most.

In its initial estimate, Eurostat had said that prices of services grew 1.2 per cent year-on-year in August. In the revised data, it changed that value to 1.3 per cent.

Inflation has fallen steadily since the end of 2011, reflecting a weak euro zone economy and near-record unemployment, after a debt crisis nearly ripped the bloc apart. Economic growth came to a standstill in the second quarter and Italy has slipped back into its third recession since 2008.

The ECB targets an inflation rate at below, but close to, 2 per cent over the medium term, a level not seen since the first quarter of 2013. It also considers anything below 1 per cent over time to be in a “danger zone”.

With August’s number, inflation has now been in that zone for 11 straight months. BNP Paribas expects the annual inflation rate to slip to 0.2 per cent in September because of lower oil prices, then rebound around the end of the year.

To push up inflation, the ECB has cut interest rates to almost zero and will start buying asset-backed securities next month, flooding the banking system with cheap cash that it hopes banks will lend on to companies and individuals.

Investors are watching to see if the ECB will go further and start a US-style bond-buying programme — purchasing sovereign debt on a monthly basis to stimulate the economy.

The ECB is most closely watching core inflation, stripping out volatile energy and food prices. Core inflation was 0.9 per cent year-on-year last month, up from 0.8 per cent in July and a low of 0.7 per cent in May, Eurostat data showed.

 

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