Tue | Feb 20, 2018

Eurozone inflation highest since April 2014

Published:Friday | December 2, 2016 | 12:00 AM

Food-price increases helped push inflation across the 19-country Eurozone to its highest rate in two and a half years, official figures showed Wednesday.

However, the rise in the annual rate to 0.6 per cent is unlikely to alter expectations that the European Central Bank will extend its stimulus programme next week.

The rise in the November rate as reported by Eurostat, the European Union's statistics agency, was somewhat of a surprise in markets following lower-than-anticipated German figures. Most economists had penciled in an unchanged rate of 0.5 per cent.

Inflation in the Eurozone is now at its highest since April 2014, when inflation stood at 0.7 per cent.

Eurostat said food, alcohol and tobacco had the biggest impact in pushing up prices in November. The main driver this year in the modest pick-up in inflation from April's minus 0.2 per cent has been the fading impact of 2015's sharp fall in oil prices. In November, energy prices were only 1.1 per cent lower than the year before, according to Eurostat. That stands in sharp contrast to the minus 7.3 per cent recorded in November last year.

Like all major economies, the Eurozone has seen subdued inflation over the past couple of years largely because of the sharp fall in oil prices. That's one of the reasons there was so much interest in the Organization of the Petroleum Exporting Countries, or OPEC, decision to cut production on Wednesday at a meeting in Vienna, Austria.

Though inflation is pushing higher, it is still well below the European Central Bank's (ECB) target of just under two per cent, a level it considers right for a healthy economy. Also, the core inflation rate, which strips out the volatile items of food, energy, alcohol and tobacco, remains historically low at an annual rate of 0.8 per cent.

As a result, the ECB is expected next week to extend its bond-buying stimulus programme further in hopes of getting inflation up towards target.

Low interest rates

The central bank is to discuss whether to extend its €1.77 trillion (US$1.9 trillion) in

bond purchases, a stimulus programme that pumps €80 billion per month into the Eurozone economy. The programme is intended to keep interest rates in the markets low, which should boost lending and economic activity, thereby assisting a rise in prices.

The earliest end date for the programme is March 2017. Analysts think the bank may extend that by three or six months. Some think that ECB President Mario Draghi will also explain how the programme will eventually be eased out - so-called tapering - as opposed to ending abruptly.

Bill Adams, senior international economist at The PNC Financial Services Group, thinks the ECB will "signal at its December 8 meeting that a taper of its asset-purchase programme is likely in 2017, possibly beginning as early as April".