Annual inflation down to 1.3% in the euro area

Claudine Rigal
Juillet 17, 2017

Euro zone headline inflation slowed in June but the core figure excluding volatile unprocessed food and energy rose, the European Union's statistics office said on Monday, confirming its earlier flash estimates.

The largest upward impacts to the euro area annual inflation came from accommodation services, package holidays and tobacco, while telecommunication, social protection and bread & cereals had the biggest downward impact.

The stubborn refusal of inflationary pressure to pick up towards the ECB's two per cent target, despite the continued fall in unemployment in the Eurozone, has made the central bank wary of raising tightening conditions either by stopping quantitative easing (QE) or raising its key interest rates.

There was a slight increase in the inflation rate for industrial goods outside the energy sector to 0.4% from 0.3% and this rate was unchanged from the previous year.

Speculation has risen since the last meeting that the central bank might be readying markets for tighter policy at its July meeting. It is now buying around €60bn in bonds each month in an effort to push money out into the broader economy and stimulate growth, with more purchases at a slower rate expected by most economists. Inflation surged to the two percent target in February, however, has since moderated to 1.5 percent in Germany in June, and only 0.8 percent in France.

The rhetoric suggests that the European Central Bank will have the confidence to start remove some of the very substantial policy accommodation, especially given the strength of growth within the Eurozone and elimination of downside risks. The pair has been on a gradual uptrend since the beginning of the year.

Draghi is also keen to avoid triggering a sell-off in Eurozone government debt akin to the 2013 USA taper tantrum, when the tapering of QE by the Federal Reserve caused panic on global bond markets. Month-on-month, the sector saw a 0.6 percent price rise.

That was in-line with economists' forecasts.

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