Eurozone inflation holds up despite big energy drag

Inflation across the 19-country eurozone held up better than anticipated in the face of waning energy prices, a sign that the region's economic recovery is reverberating across the single currency bloc, official figures showed Friday.

In its first estimate of inflation for June, Eurostat, the European Union's statistics agency, found that consumer prices rose by an annual 1.3 percent, down slightly from 1.4 percent the month before.

Though the rate has not been lower since December, the decline was more modest than financial markets had anticipated. That was likely due to the fact that the core inflation rate, which strips out the volatile items of food, alcohol, energy and tobacco such as energy, rose to 1.1 percent in the year to June from 0.9 percent.

The increase in the core rate is a further sign that many prices are being pushed up by higher wages as unemployment across the region steadily falls and economic growth improves.

A run of economic data recently has raised hopes that the eurozone economy is gaining momentum, fueling speculation that the European Central Bank may start reining in its stimulus sooner than predicted. Earlier this week, ECB President Mario Draghi spoke of a "firming and broadening" recovery, words that investors interpreted as a move to lay the groundwork for a change in policy. As well as slashing interest rates, including its main one to zero, the ECB has been buying bonds — currently about 60 billion euros ($68 billion) per month — to keep market interest rates down and encourage lending across the economy.

The ECB's primary policy aim is to keep the inflation rate just below 2 percent. A little bit of inflation is considered a good thing for an economy as it encourages consumers to spend now and businesses to invest. Inflation in the eurozone has been below target for most of the past few years, turning negative at times. However, it's been rising steadily in recent months as oil prices have bounced back from multi-year lows and in February inflation actually hit 2 percent.

Energy prices remain the main driver of the headline rate as evidenced in the June figures. The main reason inflation rate fell to a 2017 low in June was the fact that energy prices were up only 1.9 percent from the year before compared with a 4.5 percent gain the previous month. As recently as February, they were 9.3 percent higher.

Analysts said the inflation figures are unlikely to prompt any immediate turn in sentiment, and the euro remained flat at near 14-month highs of $1.14.

Jennifer McKeown, chief European economist at Capital Economics, said the figures will "add to the ECB's sense that reflationary pressures are appearing" but that the bank will remain cautious.

"The ECB will keep saying that the pace of normalization will be slow and that interest rate hikes are a long way off," she said.