Euro-Area Inflation Unexpectedly Slows as Economy Powers On

(Bloomberg) -- Euro-area inflation unexpectedly slowed in October despite the bloc’s strengthening economy, underlining why the European Central Bank last week kept its exit from monetary stimulus wide open.

Price growth cooled to 1.4 percent from 1.5 percent in September, falling short of the median forecast of economists in a Bloomberg survey. In a further blow to the ECB’s drive to boost inflation, the core rate dropped below 1 percent for the first time in five months.

The euro stayed lower against the dollar after the report and was down 0.2 percent at $1.1629 as of 11:45 p.m. Frankfurt time.

The inflation data was published alongside third-quarter gross domestic product figures, which showed faster-than-forecast 0.6 percent growth. That’s an 18th quarterly expansion. On a year-on-year basis, GDP hit 2.5 percent, the best since early 2011.

The latest economic figures show the dilemma facing the ECB. Even with confidence at its highest in almost 17 years and robust growth helping to create more jobs, a sustained price pickup remains elusive. President Mario Draghi took note of the euro area’s improved prospects after the Governing Council’s Oct. 26 policy meeting, while stressing the need for a “patient and persistent” approach toward exiting the central bank’s stimulus program.

“These are circumstances where normally the ECB would be tightening policy,” said Neville Hill, an economist at Credit Suisse Group AG in London. “Instead, the central bank has committed to QE until late next year and to not raise rates until 2019 -- the soft inflation data today will keep markets comfortable with that view. ”

Core inflation, which excludes volatile items such as food, energy and tobacco, dropped to 0.9 percent in October from 1.1 percent. Economists had forecast that the rate would remain unchanged.

Inflation Puzzle

The puzzle of low inflation isn’t just a euro-area phenomenon. Federal Reserve Chair Janet Yellen has referred to the “mystery” of tepid price growth and, even in the U.K., where a weaker currency has boosted headline inflation, wage increases remain stubbornly low. Looking for answers, factors cited include globalization, the growth of online retailers such as Amazon and post-crisis fears leaving workers without the confidence to demand bigger pay rises.

In the euro area, Draghi may not be surprised by the latest softer inflation numbers. He said last week that the rate will probably decline in the coming months due to oil-price changes.

In the meantime, the economy is growing strongly and appears to have the momentum to shake off any political instability. Inside the 19-nation currency bloc, the Spanish government took over the once autonomous regional government of Catalonia after separatists declared independence, while Germany may well be without a government until Christmas as coalition talks drag on.

The region is benefiting from an improving global economy. The U.S. reported annualized growth of 3 percent in the third quarter, the IMF raised its forecasts last month and firms worldwide are ramping up spending on new plants and equipment.

While Eurostat won’t release GDP data for individual countries until Nov. 14, some national institutions have already reported preliminary figures. The French economy grew 0.5 percent in the third quarter, while Spain’s expanded 0.8 percent.

--With assistance from Kristian Siedenburg and Andre Tartar

To contact the reporter on this story: Marcus Bensasson in Athens at mbensasson@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Zoe Schneeweiss

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