Big jump in Eurozone inf lation as uncertainties mount

ABIG jump in energy prices has pushed inflation across the 19-country Eurozone sharply higher and potentially paves the way for the European Central Bank, ECB, to plot the end of its stimulus programme.

However, amid a raft of uncertainties in Europe, the bank is likely to tread carefully in the coming months. There are worrying signs that the Eurozone economy is going through a weak spell, the region is on the brink of a trade war with the United States, and Italy and Spain are engulfed in political uncertainty.

Eurostat, the European Union’s statistics agency, said Thursday that consumer prices were up by an annual rate of 1.9 per cent in May, way ahead of April’s 1.2 per cent. That’s the highest rate since April last year and brings the headline inflation rate up to the ECB’s goal of just below two per cent.

The rise, which was slightly more than anticipated, was largely due to the sharp jump in oil prices. Energy prices were up 6.1 per cent in the year to May, more than double April’s 2.6 per cent.

Having spent years plotting to get inflation back to its goal, the ECB is now in an awkward position. The Eurozone’s economic growth slowed in the first three months of the year, to a quarterly rate of 0.4 per cent, from 0.7 per cent in the previous quarter. Ending its stimulus programme could further weaken growth.

There are also concerns that the Eurozone’s debt crisis may flare up again amid political turmoil in Italy. The country is without a government, and there are fears that another election may take place soon that will see anti-euro parties do even better.

“Be careful what you wish for, ECB,” said Bert Colijn, a senior Eurozone economist at ING.

However, underlying inflation remains benign and that may rein in expectations that the ECB will use its next meeting, on June 14, to announce an immediate reduction in its monetary stimulus efforts.

After stripping out the volatile items of energy, food, alcohol and tobacco, inflation only rose to 1.1 per cent from 0.7 per cent. The increase may suggest that lower unemployment is slowly leading to higher wages.

Looking ahead, a potential worry for the ECB is that higher oil prices and a weaker euro, which raises the cost of imports, could push inflation above target this year, squeezing consumers’ purchasing power and weighing on growth.