Eurozone back in inflation territory as oil prices rise

FRANKFURT - For the first time this year, consumer prices across the 19-country eurozone are rising, sending the common currency scurrying higher.

Official figures published today (June 2) by the European Union’s statistics agency, Eurostat, showed that consumer prices across the single currency bloc were up 0.3 per cent in May from the same month a year before. That’s up from the flat reading in April and is the first positive reading since November.

It’s also above market expectations for a more modest 0.2 per cent rise and suggests the eurozone is past its bout of falling prices, which can become a long-term threat to growth.

The euro rallied strongly in the wake of the figures, trading 1.2 per cent higher at US$1.1050. Many traders think the uptick will ease the pressure on the European Central Bank to extend its current monetary stimulus beyond its planned end date of September 2016.

Eurozone consumer prices started falling in December, partly because of a sharp drop in global oil prices. The anaemic state of the eurozone economy as well as high unemployment also kept a lid on inflation by subduing wages.

However, over the past couple of months, oil prices have started edging higher while underlying inflation pressures across the eurozone appear to be intensifying as the regional economy shows signs of improvement. That’s evident the core inflation rate - which strips out volatile items such as food, energy, tobacco and alcohol - that was up 0.9 per cent in the year to May, above April’s 0.6 per cent rate.

Policymakers at the European Central Bank will welcome the inflation news as they gather in Frankfurt for their latest policy meeting on Wednesday. However, they are unlikely to get carried away as the headline inflation rate is still way short of the target of just below 2 per cent.

In March, the ECB launched a 1.1 trillion euro (S$1.6 trillion) monetary stimulus programme that aims to stoke inflation and growth by injecting newly created money in the economy. A by-product of the policy was to push the euro down, which raises the price of imports and helps shore up inflation.

The ECB’s concerns centered on the possibility that prices might fall consistently over time. Such a longer-term fall in prices, called deflation, encourages people to put off spending and can prove difficult to reverse because it requires altering people’s expectations. It can lead to years of economic stagnation, as in Japan over the past two decades, or even something more severe, such as the Great Depression of the 1930s. - AP