Now it’s happened. Today’s preliminary estimate for the development of consumer prices in February shows the inflation rate to lie at +2.0 percent, compared with the January rate of +1.6 and the December 2016 rate of +1.1 percent. The inflation rate has therefore exceeded the specified goal of the European Central Bank (ECB) for consumer price development of „below, but close to, 2 percent“ in a relatively short space of time. Part of the dynamic increase of recent months can be attributed to weather-induced price rises in the area of unprocessed foods. But accounting for the most important share by far is the recovery in the oil price compared with a year earlier which has significantly raised prices for energy in the consumer price basket. The effect of the low energy prices, which prompted the ECB to adopt its ultra-expansionary monetary policy with negative interest rates and asset purchasing programmes, is now shifting into reverse at full strength. This can also be seen in the core rate which remained unchanged at 0.9 percent.
The underlying trend in the EMU countries is consistent: higher prices for food and far higher expenditure for energy. According to preliminary estimates for February, the inflation rate – measured in terms of the Europe-wide Harmonized Index of Consumer Prices (HICP) – amounted to +3.0 percent in Spain, +2.1 percent in Germany, +1.6 percent in Italy and +1.4 percent in France. With the exception of France, the inflation rate climbed further in all the countries mentioned in February.
The days of zero inflation and deflationary fears will most likely belong to the past for the time being. But this also clearly questions the ECB’s argumentation base for its ultra-accommodating monetary policy. A further point to consider is that the economic upswing in the Eurozone is gathering pace. And it also seems that virtually none of the potential risks, such as the approaching elections in the Netherlands and France, Brexit, or the future economic and trading policy of the USA, are able to sour sentiment. If economic growth remains solid or actually gains further momentum, the upward drift in consumer prices could even accelerate. These circumstances should prompt the ECB to act. Better growth prospects and an inflation rate of two percent are not exactly arguments to support a state asset purchasing programme.
However, a number of aspects can argue for a retention of the ECB’s monetary course. The target definition of the ECB is tied to various conditions: it needs to be fulfilled over a medium-term horizon and sustainably, and it should apply to the entire Eurozone. Neither of these conditions apply at the moment. Furthermore, the inflation rate can be expected to fall again from early summer 2017 onwards. If the price of crude oil remains more or less at its current level of around 56 US dollars per barrel, the force of the energy price increases will ease up over the course of the year. As regards food, the price increases following the weather-induced crop failures of the winter months should also moderate. In annual average terms, we therefore expect the inflation rate to lie at around 1.6 percent. While this is lower than the ECB’s target range, the narrow gap in relation to the target will increasingly cast doubts over the current orientation of European monetary policy.