FRANKFURT
Euro-area inflation slowed in June even as underlying price pressures picked up, backing the European Central Bank’s call for a prudent approach toward policy normalisation.
Consumer prices rose an annual 1.3 per cent in June — more than economists predicted — after increasing 1.4 per cent, according to a flash reading by Eurostat on Friday. The core rate, which strips out volatile components such as energy and food, increased to 1.1 per cent from 0.9 per cent in May, also exceeding estimates.
The pickup in underlying inflation is encouraging for ECB President Mario Draghi and his fellow Governing Council members who want to see proof that price growth can be sustained at their goal of below but close to 2 per cent even without central-bank support. So far, the strengthening recovery and economic confidence at the highest level in a decade have only had a muted effect — the main reason why policymakers insist that an exit from unconventional measures must be gradual, if not very gradual.
The data “will prove to be a start of a gentle upward trend in Eurozone core inflation, bolstering the ECB’s confidence in the inflation outlook and supporting our view that the Governing Council will announce a further reduction in asset purchases at its September or October meeting,” Stefan Ubovic, an economist at BNP Paribas in London, said before the report.
Spooked Investors
The ECB’s 2.3 trillion-euro ($2.6 trillion) quantitative-easing program is currently scheduled to run until at least the end of the year. In a taste of just how delicate communicating the withdrawal of monetary support will be, Draghi sparked a rally in the euro and bond yields this week when he argued that the central bank could scale back purchases without tightening policy. Investors misjudged the comments, which were meant to send a balanced message, according to people familiar with the matter.
Earlier on Friday, French data showed inflation slowed to 0.8 per cent June, after reports on Thursday revealed price growth slowed less than anticipated in Spain and unexpectedly picked up in Germany. In Italy, the worst-performing of the euro area’s largest economies, inflation came in weaker than forecast this month.
The 19-nation region recorded its fastest expansion in six years in the second quarter, according to IHS Markit’s gauge of activity in the manufacturing and services sectors. Even though momentum slowed this month, growth likely accelerated to 0.7 per cent in the April-June period.
For Draghi, a strong economic performance may mean that investors will keep looking closely for any signal on tapering, adding to the complexity of managing a very gradual return toward more normal monetary policy after for years of bond buying and negative rates.
“I believe, as all my colleagues in the Governing Council, that in principle an expansive monetary policy is currently appropriate,” ECB Governing Council member Jens Weidmann said on Thursday. “However, there can be different opinions about the right degree of monetary-policy accommodation.”
