Euro-area inflation unexpectedly slows in October

By BLOOMBERG

FRANKFURT • Euro-area inflation unexpectedly slowed in October despite the bloc’s strengthening economy, underlining why the European Central Bank (ECB) last week kept its exit from monetary stimulus wide open.

Price growth cooled to 1.4% from 1.5% in September, falling short of the median forecast of economists in a Bloomberg survey. In a further blow to the ECB’s drive to boost inflation, the core rate dropped below 1% for the first time in five months.

The euro stayed lower against the dollar after the report and was down 0.2% at US$1.1629 (RM4.92) as of 11:45pm Frankfurt time yesterday.

The inflation data was published alongside third-quarter (3Q) gross domestic product (GDP) figures, which showed faster than forecast 0.6% growth. That’s an 18th quarterly expansion. On a year-on-year basis, GDP hit 2.5%, the best since early 2011.

The latest economic figures show the dilemma facing the ECB. Even with confidence at its highest in almost 17 years and robust growth helping to create more jobs, a sustained price pickup remains elusive. President Mario Draghi took note of the euro-area’s improved prospects after the Governing Council’s Oct 26 policy meeting, while stressing the need for a “patient and persistent” approach toward exiting the central bank’s stimulus programme.

“These are circumstances where normally the ECB would be tightening policy,” said Neville Hill, an economist at Credit Suisse Group AG in London. “Instead, the central bank has committed to quantitative easing until late next year and to not raise rates until 2019 — the soft inflation data yesterday has kept markets comfortable with that view. ”

Core inflation, which excludes volatile items such as food, energy and tobacco, dropped to 0.9% in October from 1.1%. Economists had forecast that the rate would remain unchanged.

The puzzle of low inflation isn’t just a euro-area phenomenon. US Federal Reserve chair Janet Yellen has referred to the “mystery” of tepid price growth and, even in the UK, where a weaker currency has boosted headline inflation, wage increases remain stubbornly low.

In the euro-area, Draghi may not be surprised by the latest softer inflation numbers. He said last week that the rate will probably decline in the coming months due to oil-price changes.

In the meantime, the economy is growing strongly and appears to have the momentum to shake off any political instability. Inside the 19-nation currency bloc, the Spanish government took over the once autonomous regional government of Catalonia after separatists declared independence, while Germany may well be without a government until Christmas as coalition talks drag on.

The region is benefitting from an improving global economy. The US reported annualised growth of 3% in the 3Q, the International Monetary Fund raised its forecasts last month and firms worldwide are ramping up spending on new plants and equipment.

While Eurostat won’t release GDP data for individual countries until Nov 14, some national institutions have already reported preliminary figures. The French economy grew 0.5% in the 3Q, while Spain’s expanded 0.8%.