ECB tests flavours of inflation as big policy discussion looms


This isn’t the inflation the European Central Bank is looking for — but it is inflation. Figures this week are forecast to show consumer-price growth in the euro area could have reached its fastest since early 2017 on the back of more expensive oil and a rebound in travel costs. The cost of crude and a weaker euro are also set to bolster a more significant set of numbers out in June — new ECB projections that will help policy makers determine whether the time has come to scale back asset purchases.
Some Governing Council members have signalled their confidence in the inflation path is sufficient to consider ending bond buying this year. An upward revision in forecasts may convince other officials who so far haven’t seen enough progress to start discussing an exit strategy.
Policy makers’ assessment is complicated by an economic slowdown in the 19-nation euro region. Long shrugged off as a temporary phenomenon, a range of indicators have hinted at a more protracted slowdown. Investor concern over the fiscal responsibility of Italy’s incoming government is also adding to uncertainty.
“They seem to be very strongly-minded to end net asset purchases and it will probably take more for them than this recent weakness to go for another extension,” said Nick Kounis, an economist at ABN Amro in Amsterdam. “A higher headline rate creates a nice kind of window-dressing.”
A survey of economists puts the median estimate for May inflation at 1.6%, up from 1.2% in April. Some, including Bloomberg Economics, even see it hitting 1.8%.
Price growth in Germany, France, Italy, Spain is also forecast to pick up, largely reflecting external or seasonal effects.
“A flurry of euro-area readings in the week ahead will show accelerating inflation, but not for the reasons the European Central Bank would like to see. Underlying price growth remains weak,” said David Powell and Jamie Murray of Bloomberg Economics.
Core inflation is seen rebounding to 1%, a level it has hovered around for the better part of the past four and a half years.
The headline rate this month was propped up by the timing of Easter. Prices tend to surge in the run-up to the holiday before declining in the following weeks. Last year, those effects stretched into May, creating a base effect.
In a bigger scheme of things, oil has surged more than 20% since the ECB produced its March projections. It may not rise much further after Saudi Arabia signalled that Opec and its allies are likely to revive production later this year.
The euro has lost more than 5% against the dollar and some 2% in trade weighted terms in the same period. —Bloomberg

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