BRUSSELS: Eurozone inflation accelerated to 0.4 percent in January, from 0.2 percent the month before, official data showed Friday, suggesting European Central Bank efforts to boost the economy are finally bearing fruit.
Analysts said the figures, in line with expectations, would be welcome but they still remain way short of the ECB’s official two-percent target.
Howard Archer at IHS Global Insight said the report was “a modest step in the right direction for the ECB”, but largely reflected the slower pace of oil price falls and the eurozone’s central bank may have to do more to get the economy back on track.
The Eurostat statistics agency said the core inflation rate excluding volatile energy and food costs rose to 1.0 percent in January from 0.9 percent in December.
Energy prices alone fell 5.3 percent in the month, a sharp downturn but less than the 5.8 percent drop recorded in December.
Rising prices are a good indication that underlying demand is strong but the 19-nation eurozone has been bedevilled by low inflation rates for years and tumbling oil prices have complicated the outlook.
Lower prices are positive for consumers initially, but if they continue falling, shoppers tend to put off purchases knowing they will be cheaper if they wait.
That in turn dampens demand, forcing companies to put off investment which hits jobs and disposable income, adding to downward pressure in a deflationary spiral.
ECB president Mario Draghi said last week he may have to do more, even though he has already pumped hundreds of billions of euros into the economy and cut interest rates to record lows.
Archer said falling oil prices had increased fears of deflation but a weak euro which boosts exports and a continued recovery should just about hold the line.
“Relatively steady if unspectacular eurozone growth over the coming months should gradually improve companies’ pricing power, although consumers are likely to remain price conscious.”
Given the uncertain outlook, the ECB was likely to cut interest rates even further into negative territory and increase its monthly cash injections of 60 billion euros by another 20-30 billion, the analyst added.
ING Bank Financial Markets said what mattered most was the slight increase in the core inflation rate — “as small as it is important.”
The “key question” for the ECB will now be whether falling oil prices are feeding into core inflation, which would be ominous, it said.
In the meantime, the January figures are welcome.
“The movements are small and inflation is still way below the …; ECB target but at least we are moving in the right direction again,” it said in a note.
