Headline inflation rate rises from 0.5% to 0.7%

Mario Draghi got conflicting signals on inflation in April, as the European Central Bank considers taking unprecedented steps as soon as next week to avert the risk of deflation.

Headline inflation rate rises from 0.5% to 0.7%

The headline annual inflation rate missed forecasts in rising to 0.7% from 0.5% in March, the European Union’s statistics office in Luxembourg said. Yet the core rate, which strips out volatile items such as energy, food, alcohol and tobacco, rose in line with estimates to 1%, and the price of services increased at the fastest pace in more than a year.

“We didn’t have a shocker, or a smoking gun, that the ECB could use to ease as soon as next week,” said Frederik Ducrozet, an economist at Credit Agricole CIB in Paris.

Ducrozet said he sticks by his forecast of a cut in the main refinancing rate in June, with a deposit rate reduction, pushing it into negative territory, if the euro appreciates.

The data was seen as critical for the ECB as it decides whether to embrace policies ranging from negative interest rates to quantitative easing. Draghi said in Amsterdam last week that the Frankfurt-based central bank may start broad-based asset purchases if the inflation outlook worsens.

The ECB, which seeks to maintain inflation just below 2% over the medium term, forecasts price growth at 1%, rising to 1.5% in 2016.

The inflation report, which also showed the decline of energy prices slowing to 1.2% from 2.1% in March, adds to the mixed signals coming from the eurozone’s fledging recovery. While economic confidence unexpectedly decreased in April, consumer sentiment improved more than estimated. The unemployment rate, which held at 11.9% in March, has retreated from last year’s record.

“With underlying inflation not falling further, the ECB seems unlikely to downgrade its inflation outlook next week and, hence, will probably keep policy unchanged,” said Martin van Vliet, senior euro economist at ING Groep, Amsterdam.

ECB policy makers will also keep an eye on the strength of the euro as they prepare for their next meeting on May 8. If a rising exchange rate led to “a tightening of monetary conditions, a downward impact on inflation and potentially a threat to the ongoing recovery,” this would call for “policy action to maintain the current accommodative stance,” Draghi said in his Amsterdam speech.

Yesterday’s headline number “was below the market consensus, but still not enough to push the euro lower,” said Valentin Marinov, head of European Group-of-10 currency strategy at Citigroup Inc.

- Bloomberg

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