Eurozone: The price is not right as they decline by -0.1% in May - ING

Bert Colijn, Senior Economist at ING, suggests that the Eurozone is not out of deflationary territory yet.

Key Quotes

“While oil prices have risen noticeably in the past months, it has yet to affect inflation figures because it is measured on a year-on-year basis. More importantly, the core inflation rate failed to pick up significantly in May. After April’s disappointing increase of 0.7%, May showed a marginal increase to 0.8% annual growth in core prices. This means that the second round effects of the low oil price are still working through in core prices. Prices in services only increased by 1% in May, a disappointing recovery from the 0.9% last month.

The unemployment rate has provided tailwind for the Eurozone economy in the past months, as decreasing unemployment has resulted in stronger domestic demand. We are still far from experiencing significant price pressures from the labour market though. Today’s Eurozone unemployment rate release for April disappointed as the rate remained stable at 10.2%. The decline in number of unemployed was just 63 thousand, much weaker than in previous months. This hardly justifies expectations of a strong recovery in core inflation, which means that a very gradual pickup in over the coming months is likely.

This weak improvement in core inflation comes ahead of Thursday’s ECB Governing Council meeting and the start of the previously announced corporate bond purchasing program and TLTRO II. While ECB’s own projections of inflation may have improved somewhat because of the higher oil prices, today’s inflation data stress the fact that we are still far away from any ECB tapering. If anything, the ECB could use today’s data to justify their increased monetary easing that starts next month.”