Euro-area in­fla­tion ac­cel­er­ates in breather for ECB's Draghi

The Pak Banker - - COMPANIES/BOSS -

Euro-area in­fla­tion ac­cel­er­ated in Jan­uary, pro­vid­ing a re­prieve for Euro­pean Cen­tral Bank of­fi­cials that may prove tem­po­rary as com­mod­ity prices con­tinue their de­scent and emerg­ing mar­kets slow. Con­sumer prices rose an an­nual 0.4 per­cent, af­ter 0.2 per­cent last month, the Euro­pean Union's sta­tis­tics of­fice said on Fri­day. That matches the me­dian es­ti­mate in a Bloomberg sur­vey of econ­o­mists and is the big­gest in­crease since Oc­to­ber 2014.

While the ECB is on the look­out for any im­prove­ment in in­fla­tion, pol­icy

Pmak­ers will have to take this data with a grain of salt. The ef­fects from a drop in oil and food prices early last year have fi­nally faded from the 12-month fig­ure, giv­ing it a tem­po­rary boost, and the un­der­ly­ing trend in in­fla­tion has been soft.

"It's just a tech­ni­cal pos­i­tive ad­just­ment, but for the com­ing months we could see some weak­ness -- maybe in the next six months," Christophe Bar­raud, chief econ­o­mist at Mar­ket Se­cu­ri­ties LLP in Paris, said be­fore the re­port. "CPI should re­main con­tained."

ECB of­fi­cials' medium-term in­fla­tion goal of just un­der 2 per­cent re­mains far off, even as they em­ploy un­con­ven­tional poli­cies such as neg­a­tive in­ter­est rates and large-scale as­set pur­chases to boost prices.

A per­sis­tent drop in com­mod­ity prices and slow­ing growth in China and emerg­ing mar­kets have damped price pres­sures early this year and are mak­ing the goal harder to achieve.

Pro­fes­sional fore­cast­ers sur­veyed by the ECB have cut their in­fla­tion out­look for 2016 and 2017 to 0.7 per­cent and 1.4 per­cent. They see it av­er­ag­ing 1.6 per­cent in 2018, a level that the Frank­furt-based cen­tral bank pre­dicted less than two months ago would be reached in 2017.

"In this en­vi­ron­ment, euro- area in­fla­tion dy­nam­ics also con­tinue to be weaker than ex­pected," ECB Pres­i­dent Mario Draghi said at his Jan. 21 press con­fer­ence, af­ter of­fi­cials left pol­icy un­changed.

"It will there­fore be nec­es­sary to re­view and pos­si­bly re­con­sider our mon­e­tary-pol­icy stance at our next meet­ing in early March, when the new staff macroe­co­nomic pro­jec­tions be­come avail­able which will also cover the year 2018."

One in­di­ca­tor could be par­tic­u­larly wor­ry­ing for the cen­tral bank: The five-year, five-year for­ward in­fla­tion-swap rate, one mea­sure of in­fla­tion ex­pec­ta­tions that Draghi has said he watches, is at its low­est level since Jan­uary last year.

This month's in­fla­tion rate was boosted by a tech­ni­cal fac­tor. As the start of 2015 fades into last year's data, the in­dex should be get­ting a slight up­lift from so-called "base ef­fects." Gas prices dipped sharply at the end of 2014 and start of 2015, weigh­ing down year-over-year in­fla­tion fig­ures for the next 12 months. They've also dropped in the first month of 2016, though the de­cline has re­cently been less steep.

"The head­line in­fla­tion rate picks up me­chan­i­cally," Ken Wat­tret, chief eu­ro­zone mar­ket econ­o­mist at BNP Paribas in Lon­don, said be­fore the re­port.

"It looks like for the year as a whole, on the ba­sis of where the oil price is now, head­line in­fla­tion could be close to zero."

Core in­fla­tion, which strips out items with volatile prices such as fuel, rose to 1 per­cent in Jan­uary from 0.9 per­cent the pre­vi­ous month, Euro­stat said. En­ergy costs de­clined by an an­nual 5.3 per­cent.

On Thurs­day, the Ger­man sta­tis­tics of­fice said an­nual in­fla­tion rate in the euro area's largest econ­omy rose to 0.4 per­cent in Jan­uary from 0.2 per­cent the prior month. Data for Spain, pub­lished on Fri­day, showed prices un­ex­pect­edly de­clined 0.3 per­cent. Econ­o­mists had fore­cast an in­crease of 0.1 per­cent.

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