LDN - Business

Euro zone inflation slows in May, supporting ECB doves

[May 31, 2017] By Philip Blenkinsop

BRUSSELS (Reuters) - Euro zone inflation eased by more than expected in May, reflecting dips in Germany and Spain among others and supporting European Central Bank policymakers wanting only slow adjustments to rates and monetary stimulus.

Inflation in the 19 countries sharing the euro slipped to 1.4 percent, its lowest level since December, from 1.9 percent year-on-year in April, statistis agency Eurostat said on Wednesday. This was slightly below expectations in a Reuters poll of 1.5 percent.

The inflation measure which excludes the volatile energy and unprocessed food prices also fell -- to 1.0 percent from 1.2 percent, in line with expectations.

The ECB, which meets next week, wants to keep inflation below, but close to 2 percent over the medium term and has been buying 60 billion euros ($67.1 billion) worth of bonds per month to inject more cash into the economy and drive price growth closer to its target.

Reuters reported on Tuesday that ECB policymakers were set to take a more positive view of the economy when they meet on June 8 and will even discuss dropping some of their pledges to ramp up stimulus if needed.

Having fought off the threat of deflation with years of extraordinary stimulus, the debate within the ECB is shifting to the pace of normalization, pitting doves who want incremental changes against conservatives who fear that the ECB could miss its cue, forcing more abrupt moves later.

Capital Economics European Economist Jack Allen said the May fall of inflation would not stop the ECB from changing its guidance.

IMPROVEMENTS

The inflation data comes against a background of improved economic performance.

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A shopper carries a basket in a supermarket in London, Britain April 11, 2017. REUTERS/Neil Hall

Euro zone unemployment dropped to an eight-year low in April of 9.3 percent, Eurostat also said on Wednesday. Allen said this would in the past have implied annual wage growth rising to 2 percent or more, suggesting core inflation should pick up gradually.

Economic growth, meanwhile, is running at an annual rate of around 1.7 percent -- not particularly strong, but faster that in recent years.

ING economist Bert Colijn said in a note that the decline in euro zone inflation did provide a "reality check", with April driven higher by the late timing of Easter, although the ECB still faced a difficult situation with robust growth and weak price pressures.

"May's weak inflation rate suggests that the ECB is unlikely to be in any rush to change anything more than communication," he said.

Within the May data, energy prices increased by 4.6 percent year-on-year, Eurostat estimated, from a 7.6 percent rise in April. Unprocessed food costs were 1.6 percent higher than a year earlier, against 2.2 percent in April.

Services inflation also dropped back to 1.3 from 1.8 percent.

($1 = 0.8937 euros)

(Reporting By Jan Strupczewski; editing by Jeremy Gaunt)

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