U.S. News

Euro Zone Annual Inflation Stable at 1.9%

By Reuters

Euro zone inflation in April came in higher than initially estimated but still within the European Central Bank's target, data showed, pointing to subdued price-growth pressures despite robust economic expansion.

But the data is unlikely to deter the ECB from raising interest rates by 25 basis points to 4% in June and perhaps once more later this year because of the euro zone's economic strength, economists said.

European Union statistics office Eurostat said consumer prices in the 13 countries using the euro rose 0.6% month-on-month and 1.9% year-on-year, the same annual rate as in March.

Eurostat's initial estimate of April inflation was 1.8% year-on-year, which set economists' expectations at that value for the annual rise and at 0.5% on the month.

The data came in line with the ECB's price stability target of growth below but close to 2% for an eighth straight month.

"This will not deter the ECB from raising interest rates by a further 25 basis points to 4% in June," said Howard Archer, chief European economist at Global Insight.

"The ECB is looking beyond current inflation levels, and still sees significant medium-term threats to price stability stemming from potentially higher wages amid tightening euro zone labour markets, as well as excessively buoyant money supply and credit growth," he said.

"Furthermore, the ECB believes that ongoing robust euro zone growth means that there is no need for monetary policy to remain 'on the accommodative side'," Archer said.


The ECB looks also closely at what it calls core inflation, or price growth excluding volatile energy and unprocessed food prices. That gauge rose by a higher-than-expected 0.5% month-on-month in April for an expected 1.9% annual gain.

"Core inflation has been stable at 1.9% for three months now," said Luigi Speranza, economist at BNP Paribas.

"Given the impact of the German VAT hike and booming growth conditions, this is remarkable and suggests that the underlying trend remains overall benign," he said.

Germany raised its value-added tax by 3 percentage points from the start of the year in a move economists had expected to boost inflation and slow growth, but the impact on both turned out smaller than forecast.

Eurostat said clothes and transport fuels had the biggest upward impact on the monthly rate in April, although fuels had also the biggest downward impact on the consumer price index in annual terms. Prices of food, alcohol and tobacco jumped 0.7% month-on-month and 2.7% year-on-year.

With inflation under control, economic growth rates will be key to the ECB's monetary policy going forward, economists said.

"If growth is above trend, we may see another hike. If it is stabilised around trend, then rates will stabilise at 4%," said Jose Alzola, economist at Citigroup.