Eurozone inflation surges to 1.8%, intensifying ECB debate

MADRID: Eurozone inflation accelerated more than forecast to effectively reach the European Central Bank’s (ECB) goal, which may intensify a debate among policy makers about their long-running stimulus programmes.

The 1.8% annual increase in consumer prices in January was the fastest since early 2013 and beat the 1.5% median forecast in a Bloomberg survey. That’s in line with the ECB goal of just below 2%, though the less-volatile core rate remains at just half that level.

While largely driven by higher oil prices, the inflation pickup is feeding into questions about the appropriate degree of monetary stimulus for the 19-nation currency bloc. ECB President Mario Draghi has repeatedly stressed that underlying price pressures are still weak and he wants certainty that the acceleration will prove durable, though German policy makers have started to push for a discussion about winding down quantitative easing.

“It’s very straight forward: Draghi laid out the criteria that make it clear that inflation has to be self-sustained, durable over time, and for the whole of the euro area,” said Frederik Ducrozet, senior economist at Banque Pictet & Cie SA in Geneva. “This is not what the ECB would consider price stability, even if the hawks get louder.” Core inflation remained at 0.9% in January. The ECB envisaged a temporary blip in inflation. In December, it forecast average price growth of 1.3% in the three months through March, followed by readings of 1.2% in each of the next two quarters.

Until an update is published in March, the ECB will have to rely on surveys and economic data to assess the state of the region’s recovery. Confidence jumped to a six-year high in January, and separate data yesterday showed the economy grew 0.5% in the fourth quarter, in line with economists’ estimate.

The Eurostat data also showed unemployment fell to 9.6% in December, the lowest level since mid-2009. The economy expanded 1.8% in the fourth quarter from a year earlier.

German inflation accelerated to 1.9% at the start of the year, the fastest rate in three and a half years, while prices increased 3% in Spain, providing further ammunition to critics of the ECB’s ultra-expansionary policy stance in an election year. Executive Board member Sabine Lautenschlaeger and Bundesbank President Jens Weidmann have signalled that it may soon be time to phase out asset purchases, currently set to run until at least the end of the year.

Others are urging for patience as underlying price pressures remain subdued. Ewald Nowotny said on Monday that while developments in Germany are monitored, monetary policy cannot cater to just one country, reasoning that the ECB’s Governing Council won’t make a decision on the future of QE until after the summer. – Bloomberg