LDN - Business

Small euro zone inflation rise matches ECB expectations of coming dip

[November 30, 2017] By Philip Blenkinsop and Balazs Koranyi

BRUSSELS/FRANKFURT (Reuters) - Euro zone inflation rose less then expected in November, indicating that price growth remains weak and reinforcing European Central Bank expectations for a dip around the turn of the year.

Inflation in the 19 countries sharing the euro rose to 1.5 percent in November from 1.4 percent a month earlier, missing expectations for 1.6 percent, despite a surge in oil price that increased energy costs, data from Eurostat showed on Thursday.

The ECB targets inflation at just below 2 percent but has missed this objective for nearly five years as the euro zone is still just emerging from its deepest economic crisis in generations with over 14 million people still out of work.

To revive growth, the ECB has used its entire arsenal. It has cut rates into negative territory, given banks nearly unlimited access to cheap funding, and bought over 2 trillion euros worth of bonds to depress borrowing costs.

The work has paid off. Seven million jobs have been created and growth is now into its fifth year with weaker countries finally enjoying many of the benefits.

But inflation is still expected to head below 1 percent in the coming months as favorable figures from a year earlier get knocked from the data series and price growth will only head back over 1.5 percent in 2019, ECB projections show.

SLACK

Part of the reason is that labor market slack is likely bigger than official figures show.

While unemployment dipped to 8.8 percent in October, the lowest since the start of 2009, the actual slack may be twice as high, if data included part time workers seeking more hours or those excluded for various statistical reasons, the ECB said earlier.

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A woman buys bread on a supermarket in Lisbon August 30, 2011. REUTERS/Jose Manuel Ribeiro

But in a comforting sign for the central bank, core inflation or price excluding volatile food and energy, held steady at 1.1 percent, defying expectations for a small drop, suggesting that underlying price pressures are at least holding steady.

Still, with most of the big central banks around the globe struggling to prop up inflation, some have argued that weak price pressures have become a global phenomenon, increasingly outside the control of individual central banks.

"Over a two to three year period, which the ECB targets, inflation appears to be less of a monetary but rather an increasingly global phenomenon beyond individual central banks’ control," Commerzbank economist Joerg Kraemer argued.

"Global factors explain an increasing part of national inflation, whereas domestic factors such as national unemployment rates are becoming less relevant," Kraemer said.

This would suggest that more stimulus from the ECB will do little to accelerate price growth.

Indeed, a fresh Reuters poll indicated that markets see inflation easing to 1.4 percent next year from this year's 1.5 percent before a marginal rise to 1.6 percent, despite unprecedented central bank stimulus.

Klaas Knot, the Dutch central bank chief and a long-time critic of ECB policy, even argued that the bank was already fulfilling its mandate, so it should phase out its asset buys.

"The reflating economy will ultimately translate into increased pressure on wages and prices," Knot said on Wednesday. "This may however take time. Central banks can only affect the price level with long and uncertain lags."

(Reporting by Philip Blenkinsop and Balazs Koranyi Graphic by Jeremy Gaunt Editing by Alastair Macdonald/Jeremy Gaunt)

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