Inflation returns as food costs rise

The eurozone returned to inflation in May with a higher- than-expected increase in consumer prices after five months of falls and stagnation, due to rising food costs and the waning impact of cheap energy.

The European Union’s statistics office Eurostat said yesterday that consumer prices in the 19 countries sharing the euro rose 0.3% year-on-year last month after a flat reading in April, beating market expectations of a 0.2% increase.

The Eurostat estimate does not contain monthly data, but the annual data showed that more expensive unprocessed food and services had the biggest upward impact on the overall index.

Excluding the volatile energy prices, which were 5% lower in May than 12 months earlier, consumer prices rose by 1%.

Excluding energy and unprocessed food — or what the European Central Bank calls core inflation — prices were up 0.9%, a nine-month high, accelerating from a revised 0.7% in April.

“It was a positive surprise, especially the core figure,” said Teunis Brosens, economist at ING bank.

“It has been flat around 0.6%-0.7% since September. Normally, I would not normally be interested in a 0.2-0.3 percentage point change in core inflation, but in the circumstances it’s good news.”

The stronger-than-expected numbers came a day after data showed German consumer prices rising at their fastest in eight months in May.

The inflation rebound could mean that the ECB’s sovereign bond buying programme, called quantitative easing or QE, and launched in March with the aim of injecting more cash into the economy to prevent deflation, has brought rapid results.

This, in turn, will raise questions among economists whether the ECB needs to continue with the plan until its scheduled end date of September 2016.

“The ECB is clearly keen to dilute any market questioning of whether its quantitative easing programme will need to be fully implemented — given improved eurozone growth and the exit from deflation — thereby trying to keep downward pressure on the euro and eurozone bond yields,” said Howard Archer, economist at IHS Global Insight.

Prices at factory gates in April added some uncertainty to the inflation outlook, however, falling 0.1%, month-on-month, for a 2.2% year-on-year decline. That was weaker than market expectations of a 0.1% monthly rise and a 2% annual fall.

Producer prices are an indication of inflationary pressure early in the pipeline, because unless their changes are absorbed by retailers via profit margins, they tend to translate into consumer prices.

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