Eurozone inflation still not a problem

A visible deceleration in consumer price increases can be noted in the Eurozone. The inflation rate (Harmonized Index of Consumer Prices, or HICP) declined according to the preliminary estimate of Eurostat from +1.9 percent in April to +1.4 percent in May. Besides the slackening price pressure on the part of energy costs, the annual rate of which fell on the same month of the previous year from +7.5 percent to +4.6 percent, a drop was also registered in the inflation rate for unprocessed foods and, in particular, prices for services. The core rate, i.e. the inflation index excluding energy and foods, fell from +1.2 to +0.9 percent. After several special effects had led to a volatile development of consumer prices in the spring, inflation can be expected to enter calmer waters over the course of 2017. In view of this development, the European Central Bank (ECB) sees no urgent need for action.

The EMU member states, which had also already delivered a preliminary estimate on inflation development, have all registered a palpable decline in inflation. In Germany, the HICP declined from +2.0 to +1.4 percent, in France from +1.4 to +0.9 percent, in Italy from +2.0 to +1.5 percent and in Spain from +2.6 to +2.0 percent.

Where will things go from here? Consumer prices in the Eurozone have been constantly trending up and down in past months. In the years prior to this, energy prices had dragged the inflation rate down noticeably. The cold weather conditions in southern Europe early on in the year had also resulted in harvest losses which have meanwhile caused food prices to rise noticeably. Most recently, the shift in the Easter holidays from March last year to April this year also created considerable movement in the annual rate of prices for services. However, all these effects are now easing off.

At the moment there are virtually no signs suggesting that the development of inflation will head noticeably upwards again in the months ahead. Provided no special effects occur – such as an abrupt increase in the price of crude oil – the rates of consumer price inflation in EMU can be expected to remain more or less at their current level until year-end 2017. This should prove useful to the ECB as justification for its argumentation. No acute or serious price pressure can be deduced from the latest figures.

However, the economic climate has brightened up in past months so that the current inflation development is unlikely to prevent the ECB from starting its normalisation of monetary policy.

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