Euro area ends flirt with deflation as ECB pumps billions in QE

Euro-area consumer prices ended a four-month streak of declines after the European Central Bank started pumping billions of euros into the bloc’s economy through its quantitative-easing program.

Prices stagnated in April from a year earlier after falling 0.1 percent in March, the European Union’s statistics office in Luxembourg said Thursday. The inflation reading was in line with the median estimate in a Bloomberg survey. Unemployment held at 11.3 percent in March.

The improvement helps ECB President Mario Draghi’s case that large-scale asset purchases have already shown success in averting deflation in the 19-nation economy. Bank lending increased in March for the first time since 2012 and encouraging data from Germany to Spain point to a strengthening recovery even as the Greek crisis undermines confidence.

“The big bad deflationary spiral lasted all of four months,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “We expect headline inflation to accelerate to above 1 percent by year end as the depressing impact of energy prices fades,” while “core inflation will start to pick up as the effects of the past depreciation of the euro and the recovery of the economy feed through.”

Prices excluding vulnerable items such as energy, food and tobacco rose 0.6 percent from April last year, according to Eurostat. A slump in energy prices eased.

The euro was little changed after the report and traded at $1.1194 at 11:34 a.m. Frankfurt time, up 0.6 percent on the day. The Stoxx Europe 600 index was down 0.5 percent.

Short-Lived Drop

Depressed by oil prices falling almost 50 percent in the second half of 2014, the euro-area inflation rate turned negative in December and fell to minus 0.6 percent at the beginning of the year, matching an historic low. Since then, signs have increased that the region’s flirt with deflation will be short-lived.

German inflation accelerated more than economists predicted in April, and a slump in consumer prices eased in Spain. Investors are turning against euro-area government bonds in response. The yield on German 10-year bonds rose to the highest level in six weeks on Wednesday as securities slumped across the region.

Draghi has claimed that his 1.1 trillion euro ($1.2 trillion) QE plan is at least partially to credit for the nascent economic comeback and speedy reversal of potentially devastating price developments.

Sustainable Upturn

A “consistent policy response” allows the ECB to “envisage with confidence that the weak and uneven recovery experienced in 2014 will turn into a more robust, sustainable upturn,” Draghi said in the foreword of the institution’s annual report published last week. “Inflation will return without undue delay to the ECB’s objective of below, but close to, 2 percent over the medium term.”

The ECB’s latest projections foresee an average inflation rate of zero this year, rising to 1.8 percent by 2017. Growth is predicted to accelerate from 1.5 percent to 2.1 percent, which would be the fastest rate since 2007.

While uneven, the increased economic momentum can be felt from Madrid to Berlin. Spanish Prime Minister Mariano Rajoy lifted his growth forecast for the euro area’s fourth-largest economy. Gross domestic product rose 0.9 percent in the first quarter, exceeding estimates.

Germany’s government has also raised its outlook amid a strong performance of the labor market. Joblessness declined for a seventh month in April.

Political Uncertainty

Yet, risks remain as political uncertainty and the lack of structural reforms stand in the way of a sustainable recovery. Tensions between Greece and its European creditors have intensified after a meeting of euro-area finance ministers, targeted as a deadline to wrap up bailout talks, passed on Friday without an agreement even as payment deadlines loom.

“Political instability is a drag on the recovery,” said Johannes Mayr, an economist at BayernLB in Munich. “European companies, in particular in Germany, tend to postpone decisions if the political atmosphere isn’t calm enough, and investment could take a hit.”


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