BUSINESS

Euro area inflation steady at 0.5 pct underscores Draghi challenge

By Ian Wishart

The euro-area inflation rate held steady in June at less than half the European Central Bank’s target, underscoring the challenge faced by Mario Draghi as he tries to stoke prices and ignite growth.

Consumer prices grew 0.5 percent in the year, equaling May’s increase, the European Union’s statistics office in Luxembourg said today. That matched the median forecast in a Bloomberg News survey of 35 economists. Core inflation unexpectedly accelerated.

“This keeps the pressure on the ECB to keep the door open to further policy easing,” said Martin van Vliet, senior euro economist at ING Groep NV in Amsterdam. “It’s premature to suggest that this downside risk of Europe sliding into Japan deflation has vanished. It’s still a fragile economic situation.”

Anemic economic growth and persistently slow inflation prompted the ECB president and his officials to introduce a range of measures earlier this month. The Frankfurt-based central bank cut its benchmark interest rate to a record-low 0.15 percent, took its deposit rate below zero and unveiled targeted loans to help revive lending and growth.

The euro-zone economy will expand by 0.3 percent in the second and third quarters, accelerating to 0.4 percent in the final three months of the year, according to a separate Bloomberg survey of economists.

Further Stimulus

With inflation at less than half the ECB’s target of just below 2 percent for a ninth month, Draghi has prepared investors for the prospect of further stimulus should the threat of a negative price spiral remain.

“As long as the inflation rate is considerably below our definition of price stability, there is a risk that expectations for future inflation become unanchored,” ECB Executive Board member Yves Mersch said yesterday in an interview with German broadcaster Deutschlandfunk.

None of the economists surveyed by Bloomberg News expects the ECB to change its benchmark interest rate or cut its deposit rate further this month when officials meet on July 3.

Indications that the 18-nation euro-area’s recovery is flagging have been mounting with consumer confidence unexpectedly falling in June, lending to companies and households down almost 2 percent from a year ago in 2014 and the jobless rate, at 11.7 percent in April, just off the record.

Energy prices increased 0.1 percent in June after stagnating last month, today’s report showed. Prices of alcohol, food and tobacco declined 0.2 percent following a 0.1 percent rise in May. The cost of services rose 1.3 percent after a 1.1 percent jump.

The core inflation rate, which excludes volatile items such as energy, food, alcohol and tobacco, increased 0.8 percent after a 0.7 percent advance in May. That exceeds the median economist estimate of 0.7 percent.

[Bloomberg]

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