Thursday, 31 May 2012

Instant View: Euro zone inflation drops to 15-month low

BRUSSELS | Thu May 31, 2012 6:44am EDT

(Reuters) - Euro zone inflation eased by more than expected to its lowest level in more than a year in May, giving the European Central Bank a little more room to lower interest rates to help revive economic growth across the continent.

Consumer price inflation in the 17 nations sharing the euro fell to 2.4 percent year-on-year in May from 2.6 percent in April, the EU's statistics office Eurostat said on Thursday. Economists polled by Reuters had forecast inflation of 2.5 percent.



"It's in line with expectations. We expected inflation to trend downwards with the economic situation as the main reason. There's a slowdown not only in Europe, but also in China and India, which reduces pressure on commodities and therefore on inflation.

"As long as headline inflation remains above 2 percent it's crystal-ball gazing at the ECB. Do they have to do something? I think if it doesn't help, it doesn't harm either.

"If you look at money supply, credits and the way that money moves, we have to ask ourselves whether there would be a big difference if the ECB lowers rates to 50 basis points.

"Half of nothing is still nothing. The problem of the euro zone is not expensive money, it's far more structural than that. But I still think that the ECB will take a small step in the coming months."


"The decrease is caused by the fall in oil prices. Core inflation is still at 1.6 percent. The outlook depends on the oil price as well and we don't expect it to decline but to stabilize at current levels.

"That would mean that inflation would still have a 2 before the decimal point at the end of the year. We see inflation to be back in line with the ECB target in the spring of 2013.

"We have a downward trend, that took long enough, and inflation risk is low as well, if you look at wage developments in the euro zone. We are also facing a recession which means that companies will find it harder to pass on price increases. That means inflation risk is low and that gives the ECB leeway to further lower rates."


"Some all too rare recent good news for the euro zone as consumer price inflation fell more than expected to a 15-month low of 2.4 percent in May. Inflation had previously been stuck in a 2.6-2.7 percent range through the previous five months after dipping to 2.7 percent in December from a three-year high of 3.0 percent over the three months through to November 2011.

"May's drop in consumer price inflation eases the squeeze on consumers' purchasing power, thereby providing much needed support to growth. It also facilitates an interest rate cut by the ECB sooner rather than later, and there is an ever more compelling case for this given the current deteriorating economic growth environment in the euro zone and the heightened uncertainty stemming from the situations in both Greece and Spain.

"While a breakdown of euro zone consumer price inflation in May is not yet available, it is highly probable that a marked retreat in oil prices helped bring down energy and transport costs in May. It is also very possible that core inflation edged down in reaction to weakened economic activity.

"Having been sticky through the early months of 2012, the prospects are improving for euro zone consumer price inflation to head lower. Oil prices have fallen back sharply in recent weeks, while there are mounting signs that underlying price pressures are easing in the euro zone in reaction to weakened economic activity and high and rising unemployment.

"The latest European Commission business and consumer survey shows that consumers' inflation expectations fell back sharply to a 16-month low in May while selling price expectations softened appreciably among manufacturers, service companies, retailers and construction companies.

"Meanwhile, the composite output prices index of the manufacturing and services purchasing managers' surveys indicated that prices fell modestly in May.

"Pressure on the ECB to take interest rates below 1.0 percent sooner rather than later is mounting from the deteriorating economic environment and threat to activity coming from the heightened tensions and uncertainty over Greece and Spain.

"And moderating consumer price inflation, sharply lower oil prices, slowing money supply growth, weakening consumer inflation expectations and moderating business pricing expectations indicate that inflation risks are easing appreciably and the ECB has increasing scope to take interest rates lower.

"We doubt that the ECB will be willing to cut interest rates at their June 6 policy meeting and will prefer to wait and see what happens with the Greek elections and their aftermath, as well as with near-term growth and inflation developments. However, we now expect the ECB to trim interest rates in the third quarter, with July a very real possibility."


"It was slightly lower than consensus in terms of the actual decline, probably reflecting energy and food price inflation.

"In terms of the inflation outlook, we expect the recent falling streak to continue, but it will be a slow process because we expect tax increases (in some countries), which are an upward force, and a weaker euro pushing up import prices.

"In terms of looking beyond the next 6-12 months, we can say there is still no clear sign of an upturn, underlying price pressures will remain muted, so maybe there is a case for further (monetary) policy easing.

"It may take until next year before inflation falls below 2 percent."

(Reporting By Philip Blenkinsop, Robert-Jan Bartunek and Barbara Lewis; editing by Rex Merrifield)