Euro Area's Inflation Surge Won't Help Draghi Hold the ECB Line

(Bloomberg) -- Mario Draghi’s job of maintaining a sense of economic caution is already getting a little trickier.

Only a day after the European Central Bank president expressed concern that price pressures in the euro area are still too weak to rein in stimulus, a measure of underlying inflation beat forecasts to reach the strongest pace in almost four years. Another report showed money supply expanding at the fastest rate since the depths of the global financial crisis.

Euro Area's Inflation Surge Won't Help Draghi Hold the ECB Line

While the ECB has six weeks and another round of monthly data to process before its next policy meeting, the latest reports will give ammunition to Governing Council members who have publicly aired their view that the time is near to signal the gradual withdrawal of monetary stimulus. Draghi’s concern is that even discussing the matter too soon, let alone acting, will stymie the recovery.

“The risks surrounding the euro-area growth outlook, while moving toward a more balanced configuration, are still tilted to the downside,” he said after the Governing Council’s meeting on Thursday, using language that was mildly less dovish than the previous stance. “We have not seen any evidence, or any sufficient evidence, to alter our assessment about the inflation outlook.”

Friday’s inflation data was robust enough to snap a two-day decline for the euro and put it on track for the biggest weekly gain since June.

Core price growth, excluding food and energy, accelerated to 1.2 percent in April. That’s the highest reading since June 2013, and the half a percentage point jump from March is the biggest in more than 16 years.

On the same day, figures showed M3 -- a broad measure of the money circulating in the economy -- expanded in March at the quickest pace since February 2009.

While M3 isn’t necessarily a strong indicator for inflation, the fact that it shows rising credit to companies and households will likely embolden officials who want the ECB’s 2.3 trillion-euro ($2.5 trillion) asset-purchase program wound down and interest rates put on an upward trajectory.

Euro Area's Inflation Surge Won't Help Draghi Hold the ECB Line

Those central-bank governors could include Germany’s Jens Weidmann, Austria’s Ewald Nowotny, and Klaas Knot of the Netherlands, as well as the Executive Board’s Sabine Lautenschlaeger, also from Germany. Criticism of the ECB is especially intense in those nations.

On the flipside, Lithuania’s Vitas Vasiliauskas said in an interview with Verslo Zinios published on Friday that quantitative easing will probably continue as scheduled until the end of this year and that “I do not think that anything dramatic” will happen in 2018.

While inflation may be looking relatively strong, it has also been volatile in recent months. The bump in April might have been driven by little more than seasonal influences such as prices for package holidays around Easter. Data next week including euro-area unemployment, first-quarter gross domestic product and purchasing managers’ surveys will further color the debate.

Draghi, ECB Chief Economist Peter Praet -- a strong backer of the president’s stance -- and the more-critical Lautenschlaeger are all scheduled to speak in coming days.

“The ECB does not make policy based on one month of data,” said Ranko Berich, head of market analysis at Monex Europe in London. “But still, today’s release is bound to turn some heads both within the bank and the euro-zone political establishment, where opposition to QE has been slowly building.”