By Paul Hannon
Eurozone consumer prices rose at the fastest annual rate in more than three years during December, an encouraging development for policy makers at the European Central Bank who have launched a series of stimulus programs since mid-2014 in pursuit of an inflation target of just under 2%.
The European Union's statistics agency Wednesday said consumer prices in the eurozone were 1.1% higher in December than a year earlier, the highest level since September 2013 and a pickup in the annual rate of inflation from 0.6% in November.
The pickup in the overall measure of inflation was largely due to a rise in energy charges, which were up 2.5% from a year earlier, having beendown 1.1% in November.
Recent rises in oil prices mean economists expect inflation to rise closer to the ECB's target in the first three months of 2017.
Consumer prices fell as recently as May, and the accelerating rise since then has allayed fears that the currency area is at risk of sliding into a long period of deflation, which can weaken economic growth and make it difficult for borrowers to repay their debts.
ECB policy makers said that turnaround explains why they have decided to cut their monthly purchases of mostly government bonds to EUR60 billion euros ($62.4 billion) from EUR80 billion, starting in April.
But at the same time as that decision was announced in early December, central bankers extended the program to the end of this year from March, with a hint that a further extension be needed.
The main reason for their caution is that while the headline rate of inflation has picked up, the core rate--which excludes prices of items such as energy and food that are set in world markets, and little affected by the ECB's policies--has remained low. The core rate edged up to 0.9% in December, but that is only marginally above the 0.8% rate that prevailed in June 2014 when the ECB launched the first in a series of stimulus packages that have included a negative rate on deposits, a bond buying program that focuses on government issues but has been extended to corporate securities, and cheap loans for the currency area's banks.
Without a stronger pickup in the core rate, policy makers worry that the acceleration in inflation won't be sustained, and that any attainment of its target will prove short-lived.
"There are signs of an acceleration in headline inflation, above all because of the increase in oil and commodity prices," ECB executive board member Benoît Coeuré said in an interview published Friday. "However, we are still waiting for signs that core inflation is on the rise and will clearly exceed 1%. That said, our assessment of the balance of risks, including for inflation, is shifting."
Inflation in the eurozone has been damped by the weakness of the recovery since a return to economic growth in mid 2013. But there were signs of a pickup in the pace of expansion as 2016 drew to a close. IHS Markit Wednesday said its composite Purchasing Managers Index--a measure of activity in the manufacturing and services sectors--rose to 54.4 in Dec. from 53.9 in Nov, its highest level since May 2011.
The final reading for the measure, which was based on a survey of over 5,000 companies, was above the preliminary estimate of 53.9. It is consistent with other indications that suggest quarter-to-quarter economic growth picked up to 0.4% or 0.5% in the final three months of the year, from 0.3% in the previous period.
However, economists warn that slightly higher pace of growth may not be sustained through 2017 if a series of key elections in the Netherlands, France and Germany raise further questions about the eurozone's future.
"The concern is that domestic demand is likely to remain subdued over the course of 2017 as political uncertainty dominates, resulting in another year of disappointing growth across the region as a whole," said Chris Williamson, IHS Markit's chief business economist. "For the moment, however, companies are brushing off political worries."
Write to Paul Hannon at firstname.lastname@example.org
(END) Dow Jones Newswires
January 04, 2017 07:54 ET (12:54 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.