Eurozone deflation threat recedes

Inflation in the currency area rose 0.3% in the year to May

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The threat of a damaging bout of deflation in the eurozone receded in May, with price pressures rising at a higher than expected rate in the region.

Inflation in the currency area rose 0.3 per cent in the year to May, up from no change in the year to April, according to Eurostat, the European Commission’s statistics bureau. Economists had expected a figure of 0.2 per cent.

Core inflation, which strips out price changes for more volatile items such as energy and food, rose from 0.6 per cent to 0.9 per cent, suggesting that demand for services in the region was strengthening. The core measure had been stuck at a record low for two months.

The plunge in oil prices in late 2014 triggered a fall in consumer prices of 0.6 per cent in the year to January, the lowest level in more than five years.

The latest uptick in both the headline and core measures will be welcomed by rate-setters at the European Central Bank, who target inflation of below but close to 2 per cent.

The ECB’s governing council will meet in Frankfurt later on Tuesday to discuss monetary policy.

The council unleashed a €1.1tn quantitative easing package in January to counter the risk of years of ultra-low inflation. The latest inflation figure is not expected to affect eurozone central bankers’ commitment under the QE programme to buy €60bn of bonds per month until September 2016.

“We expect the ECB to continue to downplay any expectation of an early exit or tapering of its asset-purchase programme and reinforce the governing council’s intention to go the distance on its announced measures,” said Nick Matthews, an economist at Nomura.

ECB economists will unveil their latest projections to policy makers at the meeting. The forecasts are expected to show inflation rising towards target by 2017.

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