Mario Draghi’s job just became a little more difficult, because one day after the head of the ECB surprised markets with a more dovish statement than expected stressing risks for European inflation, on Friday morning Eurostat reported that Euro zone inflation rose by more than expected to the European Central Bank’s target and core inflation increased to its highest level in four years.
Inflation in the 19 countries sharing the euro was 1.9 percent year-on-year, Eurostat estimated, up from 1.5 percent in March and just short of the four-year high of 2.0 percent recorded in February. The print was also above the 1.8% consensus estimate, even though German inflation data released on Thursday which also came in hotter than expected had prepared markets for a potential stronger figure for the bloc.
The April print (released before the month is even over) was also just shy of the ECB’s medium-term target for inflation of 2 percent.
Overall inflation was higher primarily because of a 7.5% rise in energy prices and of 2.2% for unprocessed food. Prices for food, alcohol and tobacco went up by 1.5% in April, slightly lower than the 1.8% figure for March. In the services sector, the largest in the euro zone economy, prices rose by 1.8 percent in April, compared with 1.0 percent in March.
Core inflation, excluding volatile prices of energy and unprocessed food and which the European Central Bank monitors even more closely, jumped to 1.2% year-on-year in April from 0.8% in March, above market expectations of 1.0 percent. The core level was at its highest level since September 2013.
According to Bloomberg Intelligence, an Easter-related surge in prices for package holidays, particularly in Germany, is likely the predominant reason for the acceleration in core inflation.
The rate will “eventually show some signs of life as the output gap closes,” David Powell, BI’s chief euro-area economist, wrote before the release. “That may allow the ECB to announce as soon as September that its asset purchases will be tapered by 10 billion euros ($11 billion) a month in January.”
The April inflation figures will put even more pressure on the ECB to wind down its monetary stimulus, . The central bank has slashed interest rates into negative territory and adopted a bond-buying program worth 2.3 trillion euros ($2.5 trillion) to counter the threat of deflation and revive growth in the 19-member currency bloc. As reported yesterday, the ECB on Thursday stuck to its ultra-easy policy stance, but explicitly acknowledged the improvement of the euro zone economy, now on its best run since the global financial crisis.
The last time European inflation underwent such a strong bounce was in 2011, on the heels of a dramatic credit-impulse driven export of inflation by China, when then-ECB president Jean-Claue Trichet hiked rates, only to unleash the sharpest sovereign debt crisis in Eurozone history, prompting the arrival of Mario Draghi and the eventual launch of QE and NIRP.