Consumer prices in the Eurozone showed a sharp increase in the month of May led by higher energy costs and helped to soothe nerves as ECB officials battle the recent slump in inflation and the market turbulence from the geo-politics in the region.
The data comes as the European Central bank prepares to exit from its quantitative easing program which is all set to end on September 2018.
According to data from the statistics agency, Eurostat, inflation in the 19 country block sharing the euro currency increased 1.9% in May. This marks a strong gain in consumer prices from 1.2% that was registered in April. The data was also above expectations which called for a 1.6% increase.
Excluding the volatile energy and food prices, consumer prices also gained 1.3%. Core CPI was registered at 1.1% in April and managed to rise sharply. Other measure of core inflation which excludes alcohol and tobacco showed a 1.1% jump in May, up from 0.7% previously.
The ECB had been targeting a 2.0% inflation rate. Consumer prices had earlier firmed but soon started to ease back. However, the flash estimates show that the higher oil prices were feeding in to reflect the jump in consumer prices.
The latest inflation data showed that headline CPI was ever closer to the ECB’s inflation target rate. Still, with the ECB noting on various occasions that it would be focusing on the core CPI, there is still a lot more for the ECB to mull over.
Other components of the harmonized index of consumer prices also logged strong gains. The cost of food, alcohol and tobacco rose 2.6% extending the gains from 2.4% previously.
Energy prices posted a strong jump, rising from 2.6% in April to 6.1% in May. Elsewhere, other regional inflation reports showed that Germany’s consumer prices rose 2.2% in May while French inflation increased 2.3%, up from 1.8% in April.
Consumer prices in Spain also increased, rising 2.1% compared to 1.1% that was registered in April. It was only Italy, where consumer prices remained below the 2% target. Italy’s consumer prices increased 1.1% in May, up from 0.6% in April.
Other news over the week included the Eurozone unemployment rate. Data showed that unemployment rate in the Eurozone fell to 8.5% from 8.6% in April. This was the lowest unemployment rate since December 2008.
The positive data did not yield much results in the currency markets as the euro continued to remain subdued. This came amid the ongoing political drama from Italy. The markets opened to a nervous week after Italian President dismissed the coalition government formed by the 5-Star Party and the League.
However, nerves were calmed after a compromise was reached and thus fresh elections were avoided.
Still, other political concerns remain. Several high ranking officials in Spain are being investigated on charges of corruption which is expected to embolden the anti-establishment parties in Spain as well.
The above factors, alongside a stronger U.S. dollar put the euro currency on the back foot. Last week, data from the United States showed that the core PCE price index, which is the Fed’s preferred gauge of inflation was at 2.0% for the second consecutive month.
The Fed had previously signaled its willingness to tolerate an overshoot of inflation for a short while. Following the recent FOMC meeting minutes, investors have priced in another 25 basis point rate hike from Fed officials in June.
The ECB will also be meeting in June where it is likely to give its forward guidance on interest rates and also to confirm whether its 30 billion euro bond purchase program will end in September as initially indicated.
Investors forecast that the interest rates in the Eurozone could rise approximately within nine months after the QE program is closed
