Concern as Eurozone inflation stalls again

HEADLINE inflation in the eurozone came in at 1.2pc in June, unchanged from the May figure and it remains well below the European Central Bank’s 2pc target, putting markets on alert for an announcement next month of measures to boost the economy.

The details of yesterday’s release by the European Statistics Agency showed a larger-than-expected rise in core inflation, a measure that strips out volatile items like food, to 1.1pc from 0.8pc, but this was likely to due a one-off rise in holiday costs rather than the start of upward price pressures.

“With the eurozone economy having probably slowed again in Q2, and business surveys still soft, we think core inflation will remain close to 1pc for the foreseeable future,” said Andrew Kenningham, Chief Europe Economist at Capital Economics.

“We still expect the ECB Governing Council to signal in late July that further policy easing is on the way,” he said.

Subdued inflation has however been a boon to workers here, who have kept more of their pay rises and this has fed through into higher consumer spending, something that is expected to become more important to economic growth this year and next as export growth slows.

Inflation here has been running at levels that are less than half of the subdued levels in the eurozone, thanks in part the impact of Brexit worries on the pound as a weaker pound translates into lower costs here for goods.

Data for May showed the headline number fell from the prior month, although this was in large part due to a drop in the motor trade segment.

Seasonally adjusted, retail sales fell by 2.4pc from April, although if motor sales are excluded, the drop was just 1pc.

The retail numbers appeared to show that consumers remained confident, with sales of furniture and lighting, relatively big-ticket housing-related spending rising 2.1pc by volume on the month and 8.4pc from a year earlier.

The ESRI is forecasting that consumer spending will rise by 2.5pc this year.

“Looking forward … we expect household consumption to continue growing positively over the next two years,” its said in its newly-released summer economic outlook. “Given the expected increase in employment and the continued increase in earnings, this should support higher consumer spending,” it added.

One risk to that relatively rosy outlook is Brexit, and the ESRI said that consumer sentiment indicators showed the UK’s impending departure from the EU may have had an impact on spending.

The Department of Finance said this week that tens of thousands of jobs could be lost as a result of Brexit and that investment would also be hit.