Eurozone Inflation Falls for Second Straight Month in Setback for ECB -- 2nd Update

By Paul Hannon Features Dow Jones Newswires

The eurozone's annual rate of inflation fell for the second straight month in June to its lowest level in 2017, in a setback for the European Central Bank as its stimulus programs enter a fourth year.

Continue Reading Below

The European Union's statistics agency said Friday that consumer prices in the currency area were 1.3% higher than a year earlier, compared with 1.4% in May. That means the annual rate of inflation is further away from the ECB's target of just below 2%, a goal it has spent years trying to reach using a variety of stimulus measures. The ECB's economists don't expect inflation to meet the target at any point through 2019.

June's inflation reading was the lowest in 2017, largely reflecting a slowing of energy prices. It serves as a reminder of how difficult it has been for the central bank to boost consumer prices since it first resorted to extraordinary measures by taking one of its key interest rates into negative territory in June 2014.

Back then, the headline rate of inflation was just 0.5%, so progress has been made. However, the measure of core, or underlying, inflation that excludes items such as energy and food--whose prices are largely beyond the ECB's influence--tells a less heartening story. In June 2014, this measure stood at 0.8%--and wasn't much higher in June 2017 at 1.1%, up from 0.9% the month before.

Nonetheless, with economic growth accelerating, ECB President Mario Draghi hinted Tuesday that policy makers might start winding down their bond purchases.

His comments roiled financial markets, with the euro appreciating against the U.S. dollar and government bond prices falling as investors anticipate a reduction in the monthly rate of purchases under the quantitative-easing program.

Continue Reading Below

"After the market interpreted Mr. Draghi's comments as an indication that the current monetary policy could be normalized sooner rather than later, today's reality check may serve as reminder to investors that the European Central Bank is still not in a hurry," said Julien Lafargue, European equities strategist at J.P. Morgan Private Bank.

"Yet, the macroeconomic momentum remains supportive and core inflation is gradually recovering. As such the direction of travel for rates, however gradual it may be, is likely higher."

In recent months, the ECB has homed in on wages as a key factor in determining when it will be comfortable with easing back on its stimulus measures.

While acknowledging that inflation had been lower than expected given the steady fall in the rate of unemployment, Mr. Draghi said that most of the factors holding back wages were temporary and that "we can be more assured about the return of inflation to our objective than we were a few years ago."

Falling unemployment should help raise wages and in turn, inflation, but ECB policy makers have recently said slack in the jobs market goes beyond measured unemployment, and includes people who want to work more hours, and move from temporary to full-time contracts.

Ultimately, however, the ECB believes that continued strong economic growth will close the gap between what the eurozone economy can produce and what it is producing, with the result that prices will start to rise more rapidly.

"The relationship between growth and inflation may have been loosened somewhat by a number of structural changes--technological advances, globalization and the impact of structural reforms--but it has not been eliminated," said BNP Paribas economist Luigi Speranza.

"If, as the ECB expects, the output gap continues to close over time, inflation should converge gradually toward 2%--in other words, the current period of subdued inflation is temporary," he added.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

June 30, 2017 06:09 ET (10:09 GMT)