Eurozone inflation falls, though core rate inches higher

BRUSSELS, FRANKFURT. Eurozone inflation dipped as expected last month, falling further from the European Central Bank’s target and providing yet another reason for the bank to slow down in removing stimulus.

Inflation in the 19 countries sharing the euro slowed to 1.4 per cent from 1.6 per cent a month earlier, Eurostat said on Friday, another soft reading for an economy suffering its biggest slowdown since its debt crisis.

Although a moderation in energy price growth accounted for the bulk of the drop, underlying inflation, a key indicator for the ECB, also remained weak, ticking up only a touch and defying the bank’s expectation for a more substantial rise.

Still, a pickup in core inflation or prices excluding food and energy to 1.2 per cent from 1.1 per cent may be somewhat comforting for the ECB, as services costs are finally rising, suggesting that higher wages may be feeding through to consumer prices.

But the biggest worry for the ECB may now be the health of the bloc’s economy, not monthly inflation readings.

The Eurozone is barely growing this quarter and the ECB has already warned that risks are skewed to the downside, suggesting that more negative news may be in the pipeline.

Indeed, manufacturing in Germany, the bloc’s biggest economy, contracted for the first time in more than four years in January, data showed on Friday, and the Bundesbank warned that its growth forecast may need to be slashed.

All the bad news suggests that the ECB’s next move could be to provide further stimulus, having ended its unprecedented 2.6 trillion euro ($3 trillion) bond purchase scheme, known as quantitative easing, only weeks ago.

While the bond purchases are unlikely to be restarted, the ECB is expected to provide banks with more cheap loans to keep credit flowing to the real economy, even during the downturn.

It is also expected to give up guidance that points to steady interest rates through the summer and rate hikes later.

The ECB targets inflation at just below 2 per cent but has undershot this target since early 2013.

Its December forecasts, already seen as too optimistic, suggest that it will continue to miss for years to come; ECB President Mario Draghi recently argued that weakness in economic growth could mean it would take longer to lift price growth back to target.