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Euro-Area Price Slump Eases as ECB Set to Commence QE

(Bloomberg) — Euro-area consumer prices fell less than economists forecast last month, offering some relief to the European Central Bank as it prepares to put its unprecedented bond-buying program into action.

The annual rate of inflation in the 19-nation bloc stood at minus 0.3 percent in February, according to data published by the European Union’s statistics office in Luxembourg on Monday. Economists in a Bloomberg survey predicted a price decline of 0.4 percent after a 0.6 percent slump the previous month. Unemployment fell to 11.2 percent in January, the lowest since April 2012, according to revised Eurostat data.

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The data come just three days before a Governing Council meeting that’ll produce details on the ECB’s 1.1 trillion-euro ($ 1.2 trillion) asset-purchase program and an update on inflation and growth projections. While the latest data, along with an increase in oil from its recent low, may indicate the worst of the price slump is passing, the euro-region economy remains weak and burdened by high unemployment.

“The fact that core inflation remains low supports the ECB’s decision to engage in QE,” said Gizem Kara, an economist at BNP Paribas SA in London. “We expect inflation to hover around zero to slightly negative over the next couple of months, before it rebounds to positive territory by mid-year.”

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Inflation stripped of volatile components such as energy, food, alcohol and tobacco held at a euro-era low of 0.6 percent in February. Energy prices fell 7.9 percent from a year earlier after a 9.3 percent decline in January.

Market Reaction

The euro extended its increase against the dollar after the report and was up 0.3 percent at 12:31 p.m. Frankfurt time at $ 1.1234. The Stoxx Europe 600 Index was little changed when data were published before sliding 0.2 percent to 391.35.

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Separately today, Markit Economics said its euro-region manufacturing index was at 51 in February, unchanged from the previous month and just below a preliminary reading of 51.1. A print above 50 signals expansion. The report highlighted the divergences in the 19-nation economy, with manufacturing in Ireland expanding at the fastest pace in more than 15 years while French production plunged.

Economists in Bloomberg’s monthly poll forecast the euro-area economy will expand 0.3 percent in each of the first two quarters of 2015, accelerating to 0.4 percent in the following three-month periods through the third quarter of 2016. They predict consumer prices will fall 0.5 percent this quarter and 0.1 percent for the year. That compares with the ECB’s inflation goal of just below 2 percent.

Energy Prices

“Inflation is still very low and core inflation is on a downward trend,” said Fabio Fois, European economist at Barclays Plc. “The rebound is driven by energy prices, which are stabilizing, but it’s too early to speculate about the ECB or reach a conclusion.”

After falling to the lowest since 2009 on oversupply concerns, Brent crude has recovered to around $ 60 a barrel, easing some of the deflationary pressure passed on to consumers through cheaper fuel.

In Spain, where the inflation rate has been below zero for eight months, the slump in consumers prices moderated in February after hitting a record low of minus 1.5 percent in January. Prices also fell less than economists predicted in Germany while Italian inflation unexpectedly turned positive for the time in three months.

“There’s no indication that the trend in underlying inflation has changed,” said Jacques Cailloux, chief European economist at Nomura International Plc in London. “If you remove the volatile elements, mostly oil prices, core inflation remains low and the underlying trend is extremely weak.”

Concern that price declines will prompt lower wage claims and postpone spending and investment triggered the ECB’s QE program that’ll see the region’s central banks spending 60 billion euros a month on assets, mostly sovereign debt. The bulk of purchases will be made by national institutions, which will also be liable for any risks attached to the debt.

To contact the reporter on this story: Maria Tadeo in Madrid at [email protected]

To contact the editors responsible for this story: Fergal O’Brien at [email protected] Jana Randow, Kevin Costelloe

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