Eurozone core inflation has edged down, compounding the dilemma for the European Central Bank over whether to continue the biggest set of interest rate rises since the creation of the single currency.
The EU’s statistical office said on Thursday that overall inflation for the region was unchanged at 5.3 per cent in the year to August, but noted that prices excluding energy and food cooled.
The figures come ahead of the ECB’s September 14 meeting, when it faces one of its most finely balanced decisions in years: whether to risk pushing the eurozone economy into a painful recession by raising rates further, or allow inflation to become entrenched far above its 2 per cent target.
“There is plenty to pick and choose for both hawks and doves in today’s inflation data,” said Ángel Talavera, head of European economics at consultants Oxford Economics.
The headline inflation figure was above the 5.1 per cent forecast in a poll of economists by Reuters.
But core inflation, which excludes energy and food and is closely watched by the ECB as a gauge of underlying price pressures, fell in line with expectations to 5.3 per cent, down from 5.5 per cent in July.
Investors reacted by paring back bets on a 10th consecutive ECB rate rise as the euro extended its fall against the dollar to slide 0.5 per cent. The yield on Germany’s rate-sensitive two-year bond was down 5 basis points at 3.03 per cent. Bond yields fall as their prices rise.
As the ECB nears the end of its rate-rising cycle, markets have become increasingly sensitive to small shifts in economic data, highlighting how close the September decision is likely to be.
The latest figures mean inflation has remained above the ECB’s target for 26 consecutive months and is not below that level in any of the eurozone’s 20 member countries.
In an effort to slow economic activity and cool price pressures, the ECB has increased its benchmark deposit rate from minus 0.5 per cent to 3.75 per cent since the middle of last year.
But it has left the door open to a potential pause at its next meeting, with some policymakers arguing it risks driving the economy into an unnecessarily painful recession.
Isabel Schnabel, an ECB executive board member, said in a speech earlier on Thursday that recent data “point to growth prospects being weaker than foreseen” by the central bank’s bullish June forecasts, while adding the eurozone “may not be on the brink of a deep or prolonged recession”.
The ECB had predicted growth of 0.9 per cent this year — a more optimistic forecast than most economists.
Until recently one of the more “hawkish” ECB board members advocating further increases in borrowing costs, Schnabel also acknowledged there was “a risk” that the effects of its earlier rate rises would feed through “more forcefully” in the coming quarters.
But she also said a recent decline in overnight borrowing rates adjusted for inflation back to levels last seen in February could “counteract” efforts to reduce price pressures.
Inflation in the eurozone has fallen more slowly than in the US, where it was 3.2 per cent in July, but faster than in the UK, where the latest reading was 6.8 per cent.
Energy prices dropped 3.3 per cent in the year to August, a more modest decline than in the previous two months. This offset falls in food, alcohol and tobacco inflation to 9.8 per cent and in industrial goods inflation to 4.8 per cent. Services inflation dipped from last month’s record high to 5.5 per cent.
Separate data from Eurostat showed the number of unemployed people in the eurozone rose 73,000 in July from June, but the jobless rate remained at a record low of 6.4 per cent.
Adding to the signs of weakening economic activity, German retail sales were down more than expected in July, falling 0.8 per cent from the previous month, according to the federal statistical agency.
Source: Economy - ft.com
