Euro-Area Inflation Rate Climbs Above 2 Percent on Energy

(Bloomberg) -- Euro-area inflation accelerated in September amid a surge in energy costs, while underlying price moves remained more subdued.

The core measure of inflation, which strips out volatile energy and food, fell to 0.9 percent from 1 percent. That’s a blow to European Central Bank President Mario Draghi, who just this week cited faster wage growth and a “relatively vigorous” pick-up in underlying price pressures.

The euro extended its decline after the report, ignoring an oil price-led pickup in the headline inflation measure to 2.1 percent. That’s above the ECB’s goal.

Euro-Area Inflation Rate Climbs Above 2 Percent on Energy

An energy-fueled surge in consumer-price growth is likely to complicate the central bank’s exit from unconventional stimulus. While headline inflation is the ECB’s official guidepost, policy makers have paid more attention to the core rate in recent years as it better reflects domestic fundamentals. That gauge has hovered around 1 percent for the past five years and hasn’t been close to 2 percent since the global recession.

“There’s simply no convincing sign of underlying price pressures rising despite strengthening wage growth,” said Oliver Rakau, chief German economist at Oxford Economics in Frankfurt. “That won’t halt the ECB’s plans to end QE purchases at the end of the year, but if core inflation fails to rise from its subdued pace in the coming months, markets will start to increasingly question the timing of the first interest rate hike.”

The central bank intends to halt its quantitative-easing program in December after buying 2.6 trillion euros ($3 trillion) worth of debt and has pledged to keep interest rates at record lows through the summer of 2019. Executive Board members Peter Praet and Benoit Coeure have already shifted their focus on communicating when and how fast interest rates will rise, arguing at the same time that stimulus is still warranted.

National Inflation DataSeptemberSurveyAugust
Germany2.2%1.9%1.9%
France2.5%2.6%2.6%
Italy1.6%1.7%1.6%
Spain2.2%2.3%2.2%

Price growth in Germany, Europe’s largest economy, unexpectedly jumped to a four-month high this month, sparking calls for a more ambitious path toward policy normalization.

If euro area inflation remains stuck above 2 percent, the ECB should consider raising borrowing costs earlier than currently planned, said Clemens Fuest, president of the country’s Ifo institute. Governing Council member Ewald Nowotny of Austria has also argued there may be a case for tightening policy sooner.

The euro area is enjoying robust economic growth and solid domestic demand has pushed unemployment to a decade-low. But risks persist, including a hard Brexit, investor concern about Italian fiscal policy, emerging-market turmoil and an escalating trade war.

©2018 Bloomberg L.P.