Eurozone inflation hits 2% for first time in four years

A milestone.

Annual inflation in the eurozone accelerated to hit 2 per cent for the first time since January 2013 last month, underscoring a sharp rise in prices driven by higher energy costs in the single currency area.

February’s year on year inflation reading, which rose from 1.8 per cent and was in line with analyst estimates, comes as inflation hit 2.2 per cent in Germany last month and registered over 3 per cent in Spain.

The eurozone’s core inflation measure however, which strips out volatile energy and food prices, remained unchanged at 0.9 per cent and has remained stubbornly below 1 per cent since August 2013.

The European Central Bank, which will mark the two year anniversary of its stimulus measures this month, has snapped up assets worth over €1.5tn in its bid to lift prices and growth in the bloc.

But ECB president Mario Draghi will face increasingly emboldened hawks within the central bank as inflation has now exceeded policymakers’ target of average inflation just under 2 per cent.

Eurostat said energy prices climbed 9.2 per cent last month compared to February 2016, while the price of food, alcohol and tobacco rose 2.5 per cent and services costs were up by 1.3 per cent.

The news that price pressures are returning more quickly than the ECB expected after four years of low inflation is likely to trigger a push from the governing council’s more hawkish members to drop a commitment from the bank to do more should the eurozone’s economic recovery veer off track.

Economists however think inflation will likely peak in the coming months before falling back to more subdued levels in late 2017 and 2018.

“Base effects in energy turn negative from this month and upward tensions in food prices are likely to subside soon”, said Giada Giani, economist at Citi.

The ECB continues to hold rates at historically low levels and has promised to buy €780bn-worth of bonds this year as part of its landmark quantitative easing programme.

Its stimulus measures have helped boost the eurozone’s sluggish recovery in recent months and bring down unemployment to the lowest since the bloc’s sovereign debt crisis in 2012.

Eurostat figures today also revealed that the bloc’s jobless rate stuck at a more than four-year low of 9.8 per cent in January.

Read more: Mario Draghi’s new inflationary headache