Boost for ECB as eurozone prices turn positive in May

http://www.theguardian.com/business/2015/jun/02/ecb-eurozone-prices-positive-may

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Eurozone inflation turned a corner in May, posting a 0.3% increase after four months of flat or fallingprices.

The measure of core inflation, which strips out food, energy and other volatile elements of the consumer prices index, jumped even higher to 0.9%, signalling a resurgence in demand across the eurozone.

The euro edged up 1% to push through $1.10 while sterling remained steady at 1.37 as the return of modest inflation combined with hopes for better news on Greece to bolster investor confidence.

Inflation in the service sector rose by 1.3%, up from 1.0% in April, while food, alcohol & tobacco prices rose by 1.2% (up from 1.0%). And the prices of non-energy industrial goods rose by 0.3%.

Eurozone prices started falling in December, partly because of a sharp drop in global oil prices. The anaemic state of the eurozone recovery, which has lagged the UK and US in the last two years, has also played a major role in keeping a lid on inflation, with high unemployment and stagnant wages. However, over the past couple of months, oil prices have started edging higher. Energy prices in May were down by 5% year-on-year, having been 5.8% lower in April.

The rebound in oil prices coincided with the European Central Bank’s €1.1tn boost to lending across the eurozone, which began to take effect in April.

Policymakers at the ECB are expected to feel vindicated as they gather in Frankfurt, Germany, for their latest policy meeting after heavy criticism of their decision to adopt quantitative easing. The move appears to have played a major role in improving household and business confidence to move the eurozone economy up a gear.

However, they’re unlikely to get carried away as the headline inflation rate is still way short of the target of just below 2%.

Timo del Carpio, European economist at RBC Capital Markets, said: “While today’s outturn may provide further breathing room for the governing council by reducing the risk of a more pernicious deflationary environment taking root it is far from sufficient to precipitate a change of course.”

ECB president Mario Draghi may even increase his forecast for economic growth when the central bank’s governing council reports on Wednesday.