Euro-Area Inflation Jumps as ECB Warns Against Undue Optimism

Euro-Area Inflation Jumps as ECB Warns Against Undue Optimism

Headline rate rises to 0.9%, with core at highest since 2015. Increase partially due to phased-out sales-tax cut in Germany

Inflation returned to the euro area in January thanks to temporary shifts in prices, suggesting the European Central Bank won’t see any need to change its course in supporting the economy.

Consumer prices rose an annual 0.9%, more than economists expected, for the first gain in six months. A measure that excludes volatile items such as food and energy surged to 1.4%, the highest in more than five years.

The readings will likely be welcomed by ECB policy makers, even if they’re driven mostly by technicalities such as expired tax cuts and higher energy costs instead of economic fundamentals. Despite unprecedented monetary stimulus last year to support the region through its worst crisis in living memory, the outlook remains gloomy.

“Temporary factors are pushing up inflation at the moment,” and “that’s exactly why the ECB shouldn’t be alarmed,” said Bert Colijn, senior euro-zone economist at ING. “With wage growth weakening and unemployment expected to increase in 2021, sustainable moves toward target remain a while away.”

The 19-nation bloc is headed for a double-dip recession after output declined in the fourth quarter and strict lockdowns across the region weigh heavily on activity at the start of the year. Purchasing Managers’ Indexes published Wednesday showed services shrinking at an accelerated rate in January, with manufacturing slowing amid subdued demand and pandemic-related supply disruptions that are driving inflation pressures in return.

According to a separate report, euro-area producer prices rose 0.8% in December from the previous month, while the annual rate of change remained negative.

Consumer prices jumped especially sharply in Germany, the region’s largest economy, where a temporary reduction in sales taxes was phased out at the start of the year. A 3.8% surge in energy costs in January as well as more expensive food also bolstered euro-area inflation.

ECB Executive Board member Isabel Schnabel has cautioned against mistaking short-term spikes in prices for sustained inflation pressures, arguing that demand will remain weak in the months ahead. The ECB currently foresees inflation averaging just 1.4% in 2023, compared to a goal of just below 2% over the medium term.

Officials including Klaas Knot, Olli Rehn and Gabriel Makhlouf told Bloomberg TV last week that the central bank is ready to use all its instruments including interest-rate cuts if needed, reiterating a message President Christine Lagarde relayed following the Governing Council’s first policy meeting of 2021. For now though, they said, the economy is getting the support it needs.

Judging whether the euro area will need another boost is being complicated by a change to how inflation is measured. Statisticians started to base their calculations on spending patterns from last year, which involved less traveling and eating out. According to Bloomberg Economics, that could result in significantly lower inflation rates in some months this year than the region would have seen if they had assumed a return to pre-crisis behavior. es un sitio web oficial del Gobierno Argentino