A euro sign sculpture is seen outside the European Central Bank (ECB) headquarters in Frankfurt, Germany. (Photographer: Hannelore Foerster/Bloomberg)  

Underlying Inflation Weakens as ECB Prepares for Crucial Meeting

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Underlying price pressures in the euro area remain weak, according to the latest inflation figures for the region, giving European Central Bank policy makers more to digest ahead of their crucial meeting next week.

Core consumer-price growth, which strips out volatile components such as energy and food, unexpectedly slipped to 1 percent from 1.1 percent, Eurostat said Friday. The headline rate came in at 1.5 percent, up from 1.4 percent a month earlier.

Underlying Inflation Weakens as ECB Prepares for Crucial Meeting

The report offers some of the last major pieces of information before the ECB’s March 7 meeting, when officials will gauge whether the economic slowdown is serious enough to require a fresh monetary boost. While some policy makers have started to lay the groundwork for action, others including the institution’s chief economist-in-waiting Philip Lane are confident inflation will eventually rise on the back of stronger wages.

What Our Economists Say...
“The ECB will focus more on the decline in core inflation in February than the pick up in the headline rate when it meets next week. However, they won’t have enough detail to determine what caused it. As such, the Governing Council is likely to look through it.”

--David Powell and Jamie Murray, Bloomberg Economics. Read more here

Unemployment in the euro-area was at 7.8 percent in January, staying at the lowest in more than a decade.

A Purchasing Managers’ Index showed factories suffered their biggest drop in orders in almost six years in February. At the same time, economic confidence in the euro area extended its decline, although a solid performance in services offered a cautious reason for optimism.

ECB officials have flagged that they expect to cut their economic forecasts for this year. Whether the current weak phase will have implications for their medium-term outlook and thus monetary policy is less clear.

Economists surveyed by Bloomberg predict policy makers will take their time assessing the situation before offering new long-term loans. They also pushed back their expectations for when interest rates will start to rise.

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