Consumer prices rise to 0.4pc – their highest level in 14 months – but it won’t be enough to prevent another shot of stimulus from the ECB in March
Inflation is finally showing signs of returning to the eurozone after figures from January suggested consumer prices had risen to their highest level since October 2014.
Headline inflation in the 19-country bloc rose to 0.4pc at the start of the year, according to a flash estimate from Eurostat, up from 0.2pc in December.
More encouragingly for Europe’s policymakers, core inflation – which strips out the impact of volatile elements such as energy – also inched up to 1pc from 0.9pc at the end of 2015.
Inflationary pressures were generated by a 1.2pc increase in the price of services, and a 1.1pc rise in the cost of food, alcohol, and tobacco. Energy continued to be drag on consumer price growth, declining by a further 5.3pc – from December’s -5.8pc.
The figures come after the president of the European Central Bank repeated his commitment to returning inflation to its target of close to but below 2pc in recent weeks.
Mario Draghi is poised to deliver another shot of quantitative easing into the veins of the eurozone economy at the ECB’s next major meeting in March, amid fears the central bank is losing credibility and could even be forced to lower its inflation target.
Economists said January’s jump was unlikely to derail the ECB’s dovish policy stance, despite a small group of hawks within the governing council objecting to more stimulus measures.
“In the current economic environment dominated by low interest rates, low oil prices and threats of deflation, every bit of good news is welcome,” said Kay Daniel Neufeld from the Centre for Economics and Business Research.
But the sharp sell-off in oil prices at the start of the year is likely to see inflation fall back again next month, said Jonathan Loynes at Capital Economics.
“Depending on the path of oil prices, headline inflation could then stay very close to zero in the first half of this year and might even fall back into negative territory,” said Mr Loynes.
ECB policymakers are concerned that collapsing oil prices – which represent a net positive for eurozone consumers – could spill over and push down core inflation, said Frederik Ducrozet of Pictet Asset Management.
Economists now expect the ECB to slash interest rates by another 10 basis points and ramp up the size of its QE programme by €20bn to €80bn a month.
“A more ambitious package cannot be ruled out in the event of external shocks,” said Mr Ducrozet.