Eurozone consumer prices were slightly higher on the year in June, but that left the European Central Bank no closer to meeting its inflation target than when it launched the first of a series of stimulus measures intended to achieve that goal two years ago.
Figures released by the European Union’s statistics agency Thursday underline the difficulty of boosting inflation at a time of weak demand growth not just in the eurozone, but around the world. And with the U.K.’s decision to leave the European Union threatening to slow the eurozone’s modest recovery further, the ECB has indicated it may have to provide yet more stimulus to meet its objective.
The ECB’s June 2014 stimulus program came as the annual rate of inflation hit 0.5%. It has never been higher since then. Prices first fell below their year-earlier levels in December 2014, and the eurozone has drifted in and out of deflation ever since.
Back in June 2014, the ECB’s economists forecast that the annual rate of inflation would be 1.4% this year. Earlier this month, they forecast prices would rise by just 0.2%. In March, the ECB launched yet another stimulus program, which included more cuts to its key interest rates, the addition of corporate bonds to an existing program of quantitative easing, and a fresh program of cheap loans for banks.
Eurostat said consumer prices were 0.1% higher than in June 2015, having been 0.1% below their year-earlier level in May. The rise in prices was a minor surprise, since economists surveyed by The Wall Street Journal last week had expected prices to be unchanged on the year.
Lower energy prices have been a key factor behind the period of very low inflation since 2014, but prices of other goods and services have also been rising more slowly, a sign that weak demand within the eurozone has contributed to the ECB’s difficulties.
In June, core inflation?which excludes items such as food and energy, the prices of which are set mainly in world markets?picked up to 0.9% from 0.8% in May, but remained below the 1.0% rate recorded at the start of the year.
Over recent months ECB President Mario Draghi has turned up the volume on his calls for more decisive action by eurozone governments to undertake economic overhauls that would help boost growth and inflation. More recently, he has stressed the need for greater cooperation between major central banks to tackle a problem that is common to all.
Addressing an audience of policymakers and academics at an ECB conference in Portugal Tuesday, Mr. Draghi said central banks should think about whether their policies are “properly aligned” with those of their peers. He warned that currency devaluations aimed at boosting competitiveness are a “lose-lose” for the global economy.”
“In a globalized world, the global policy mix matters and will likely matter more as our economies become more integrated,” Mr. Draghi said. “The speed with which monetary policy can achieve domestic goals inevitably becomes more dependent on others.”
The U.K.’s decision to leave the EU in a referendum held June 23 will likely add to the impediments confronting the ECB. Mr. Draghi estimates that the vote and its immediate consequences will reduce economic growth in the eurozone by up to 0.5% over three years, reflecting the U.K.’s importance as the currency area’s second-largest export market after the U.S., as well as the possible perception that the EU could become ungovernable.
The ECB is unlikely to respond immediately to that prospect, preferring to wait for evidence that the expected impact is materializing. Speaking Wednesday, ECB Vice President Ví tor Constâ ncio said “things can become quite bad” in the wake of the U.K. vote, which could prompt eurozone banks to cut their lending.
“We need to wait a little bit to see if we need to respond,” Mr. Constâ ncio said.
In its first assessment of the economic impact of the Brexit vote, the Institute for International Finance said eurozone growth will be weakened in both the second half of this and the first half of next year.
“We expect the ECB to announce an extension of QE in the coming months that would maintain and possibly increase asset purchases beyond the current end date of March 2017,” said the IIF, which represents more than 500 of the world’s largest private banks, insurers, and hedge funds. “Moreover, the ECB seems likely to introduce further easing measures.”