Euro-Area Inflation Slows to Weakest Level Since April

(Bloomberg) -- The euro’s area’s inflation rate declined further at the start of the year, though there was a small pickup in an underlying measure.

The headline rate fell to 1.4 percent in January, in line with the median estimate of economists, though still the weakest since April. Core inflation rose to 1.1 percent, the highest in three months.

Euro-Area Inflation Slows to Weakest Level Since April

The 19-country bloc is in the throes of a slowdown that has the potential to delay ECB policy tightening or even prompt a fresh injection of stimulus. With domestic political tensions and the U.S.-China trade dispute weighing on sentiment, the economy finished off last year with only a meager rise in output.

Italy has sunk into recession, forward-looking indicators almost uniformly paint a bleak picture, and Germany, the largest economy, slashed its growth outlook this week.

What Our Economists Say:

“With growth having slowed, it’s only the prospect of bigger wage gains and higher inflation that’s keeping ECB stimulus withdrawal on the table. Today’s drop in the headline rate means little in itself -- the decline is all to do with energy costs. Still, the ECB will be concerned that lower headline inflation could drag on pay settlements.

--Jamie Murray, Bloomberg Economics. Read the full REACT

While policy makers halted net asset purchases in December, they’ve committed to keeping borrowing costs at their historic lows through the end of the summer, if not longer, in a bid to push inflation toward their goal of just below 2 percent.

“What is next?” ECB President Mario Draghi said last week. “Next will depend on whether we will end up assessing this slower growth, or the factors that have produced this slower growth as persistent.”

While risks to the economic outlook have shifted to the downside due to rising protectionism, softer Chinese demand and European politics, officials still consider the chance of a recession as being low.

Unemployment continues to decline, pushing up wages and helping domestic demand. While the ECB expects the core rate to increase in the medium term, professional forecasters surveyed by the central bank revised down their estimates.

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