Eurozone Remains in Deflation
31 May 2016 - 11:00AM
Dow Jones News
The eurozone was still mired in deflation during May, and while
economists expect consumer prices to start rising in coming months,
success for the European Central Bank in meeting its inflation
target is far from assured.
The European Union's statistics agency on Tuesday said consumer
prices were 0.1% lower than in May 2016, the second straight month
of deflation in the currency area.
That's a frustrating outcome for ECB policy makers, who have
launched a series of stimulus packages since mid-2014 with the aim
of raising inflation to their target of just under 2%, the most
recent coming in March.
Inflation has been below the ECB's target for more than three
years, including two years over which it has been at 0.5% or lower.
Since December 2014, the eurozone has been in deflation for eight
months, including May.
However, rising oil prices point to a pickup in inflation during
the second half of this year, and the ECB's economists are expected
to raise their inflation forecasts Thursday, a rare occurrence in
recent years.
Economists at Standard & Poor's estimate that oil prices are
30% higher than the ECB's assumptions for 2016 and up 75% from the
trough reached in late January of this year.
Inflation may receive an additional boost if the U.S. Federal
Reserve were to raise its short-term interest rates over coming
months, since that would likely weaken the euro and raise prices of
imported goods and services.
There are also signs that the ECB's efforts to boost bank
lending are having some success. Figures it released Tuesday showed
lending to the private sector was 1.2% higher in April than a year
earlier, compared with growth of 1.1% in March, although lending to
households slowed.
However, the ECB's ability to meet its inflation target will
ultimately depend on the strength of economic growth within the
eurozone, and that is likely to remain weak.
Inflation has been extremely low for so long in part because of
the modest nature of the eurozone's recovery, with the economy only
returning to its precrisis size in the first three months of this
year.
Eurostat's figures showed that excluding items such as food and
energy, the prices of which are set mainly in world markets, the
core rate of inflation was just 0.8%, a pickup from 0.7% in
April.
While the eurozone economy had a stronger first quarter than
either the U.S. or the U.K., economists expect to see a slowdown in
this and subsequent quarters, leaving growth for 2016 roughly in
line with a disappointing 2015.
Figures also released Tuesday by Eurostat showed the jobless
rate was unchanged from March at 10.2% in April, although there
were 63,000 fewer people without jobs. That left the eurozone with
an unemployment rate more than double that of the U.S., leaving
consumer demand weaker and businesses more reluctant to raise their
prices.
Despite the improved outlook, ECB economists are expected to
continue to forecast that inflation will remain below target in
2018. The ECB's governing council is expected to leave policy
unchanged when it meets Wednesday and Thursday, but ECB President
Mario Draghi will likely signal that further stimulus measures are
a possibility if inflation doesn't pick up decisively later this
year.
Todd Buell contributed to this article.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
May 31, 2016 05:45 ET (09:45 GMT)
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