Eurozone Inflation on Rise: Future of ECB’s Quantitative Easing Unclear

Written by | Thursday, June 4th, 2015

The Eurozone has returned back to inflation in May with a higher than anticipated rise in consumer prices after almost half a year of stagnation. The increase was possible mostly thanks to increasing food prices and cheap energy. EU’s chief statistics office, Eurostat, announced on Tuesday (2 June) that inflation rose 0.3 percent year-on-year last month beating market anticipations of 0.2 percentage increase. The annual data revealed that more expensive services and food had the biggest impact on the inflation rate. When energy prices are excluded from calculations, inflation growth rate is 1 percent. Eliminating energy and unprocessed food – which is so-called core inflation – prices rose by 0.9 percent, a nine-month high.

According to Teunis Brosens of ING bank, “it was a positive surprise, especially the core figure”. He added that “inflation has been flat around 0.6-0.7 percent since September”. He added that he would “not normally be interested in a 0.2-0.3 percentage point change in core inflation, but in the circumstances it’s good news”. An unexpected rise in inflation was also a positive response to the German rise in consumer prices, which hit its eight-month high last month. Overall, it is believed that the rise in inflation is also the result of the massive sovereign bond-buying program launched by the European Central Bank (ECB) in March this year. The aim of the program was to fuel the Eurozone economy with more cash to prevent possible deflation.

This rapid outcome of the QE is now expected to raise questions among analysts whether the ECB should continue with sovereign bond buying, which is supposed to run at least until September 2016. However, some economists have already commented that the rise in consumer prices is still well below the ECB target of 2 percent and therefore it will not be enough to change the bank’s further QE plans. Frankfurt is still planning to inject more than €1 trillion into the Eurozone economy in €60 billion monthly increments until the anticipated end of the program.

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