German Inflation Unexpectedly Slows, Validating ECB Caution

(Bloomberg) -- German inflation unexpectedly slowed in April, validating the European Central Bank’s caution in moving extremely gradually toward withdrawing euro-area stimulus.

Price growth in the currency bloc’s largest economy cooled to 1.4 percent, defying expectations it would hold at 1.5 percent. In Italy, the third largest economy, the inflation rate dropped more than forecast this month, while Portugal’s measure also fell.

German Inflation Unexpectedly Slows, Validating ECB Caution

The timing of Easter holidays -- and its effect on airfares and package holiday costs -- may be partly to blame for the softer numbers. The national inflation reports come ahead of the euro-area number on Thursday, which economists forecast will come in at 1.3 percent. The core rate is predicted to slip back to below 1 percent.

ECB President Mario Draghi said last week that the institution must assess developments across the euro region before deciding the next policy steps. Officials are attempting to gauge whether recent weakness in economic indicators marks a temporary breather for the region’s expansion or if it signals a more significant downturn.

What Our Economists Say:

“Like the readings in many countries of the euro area, the fall in German inflation in April had more to do with the timing of Easter than the underlying state of the economy. The figures are likely to be volatile for the remainder of the year, but the underlying trend should be upward.”

--David Powell and Jamie Murray, Bloomberg Economics

The central bank currently intends to continue its bond-buying program until at least September, and most economists expect it to be wound down by the end of the year. Some of Draghi’s colleagues have brushed off concerns, saying the economy will continue growing at a solid pace.

“The recovery is not coming to an end,” Executive Board member Benoit Coeure said on Friday at a meeting of finance ministers and central bankers in Sofia, Bulgaria. “One reason is it’s not a recovery, it’s an expansion, so we’re beyond the recovery already.”

©2018 Bloomberg L.P.