Euro area inflation accelerates in October

Euro area inflation accelerates in October

Xiaoqing Pi

Eurozone inflation accelerated in October and under-lying price pressures increased, complicating policymakers’ choices after the economy expanded at its weakest pace since 2014.

Consumer prices jumped 2.2% from a year earlier while a measure that strips out volatile components rose to 1.1%. Inflation has been stronger than the ECB’s goal of just below 2% for the past five months. ECB president Mario Draghi has expressed confidence that a robust labour market and growing wages will also lift core prices.

“The acceleration of euro-area inflation in October provides little reason for excitement. The headline figure was lifted by energy costs and the core print by legislative changes in Italy. Neither of those have much to do with the underlying state of the economy. The ECB will have to keep waiting for signs of the “vigorous pick-up” recently alluded to by president Mario Draghi,” said Bloomberg Economics.

Yet, while the inflation outlook is firming, prospects for the economy have deteriorated. Growth ground to a halt in Germany and Italy, two of the region’s three largest economies, and weaker sentiment indicators don’t point to a strong rebound. Risks remain prominent, as well, with Italy’s budget crisis dragging on and a hard Brexit becoming more likely.

The mix of accelerating inflation and slowing growth comes at a tricky time for the ECB, where policymakers are poised to cap asset purchases this year. So far, they haven’t raised the alarm, with Draghi saying last week that the euro area is facing “weaker momentum, not a downturn”.

ECB governing council members Ewald Nowotny and Ardo Hansson both said yesterday they see no compelling reasons to alter policy. “There has been no significant material change that would increase doubts about the present forecasts” of the ECB, Hansson said. “There are some temporary factors at play.”

Nowotny said he expects a downward revision when the ECB updates its growth and inflation projections next month, but not enough to delay the end of asset purchases.

- Bloomberg

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