Eurozone inflation remains stable ahead of expected spike

Consumer prices rose 0.9% in February compared to a year earlier

A customer pushes a shopping trolley at a Carrefour Hypermarket store in Nice, France. Eurozone inflation remained stable in February as coronavirus restrictions weighed on the region’s economy. ReuteShow more

Eurozone inflation remained stable in February as coronavirus restrictions weighed on the region’s economy ahead of an expected spike in consumer prices in the coming months.

Prices in the 19 countries sharing the euro rose 0.9 per cent compared to a year earlier, stable compared to January, according to a flash estimate from Eurostat, the European Union's statistics office.

January's 0.9 per cent rate marked a big leap after several months of negative inflation due to falling consumer demand caused by the Covid-19 crisis and the restrictions put in place across Europe to address it.

Sam Miley from Oxford Economics said there is scope for eurozone inflation to increase further in the coming months, with pressure coming from energy prices which fell considerably in 2020.

“As such, any annual comparisons will be subject to an extremely low comparative base. Despite the impact on households’ bottom line, the potential upward trend in headline inflation is unlikely to move policymakers at the European Central Bank, who are more focused on the core inflation measure,” Mr Miley said.

Food prices saw the fastest year-on-year growth in February of 1.4 per cent, while energy prices were down just 1.7 per cent, following annual contractions of 8.3 per cent, 6.9 per cent and 4.2 per cent in November, December and January, respectively.

“This smaller contraction means that energy prices provided less of a drag on inflation, putting some upward pressure on the change in the inflation rate,” said Mr Miley

Last week, Bank of England chief economist Andy Haldane warned central bankers around the world to keep an eye on prices as he compared inflation to a "tiger" that has been woken up and could prove difficult to tame.

He said a post-lockdown surge in demand could put pressure on coronavirus-hit economies and said central banks should be cautious about “acting too conservatively by tightening policy prematurely”.

“The greater risk at present is of central bank complacency allowing the inflationary [big] cat out of the bag,” he said.

While the ECB will generally welcome the return of faster inflation, it has also pledged to ignore short-term spikes this year as it continues to support the economy with a wave of liquidity.

In January, ECB president Christine Lagarde held the pandemic bond-buying programme at €1.85 trillion ($2.26tn), following a €500bn boost in December, and reiterated that it will run until March 2022 at the earliest.

Jack Allen-Reynolds, senior Europe economist at Capital Economics, expects the eurozone's headline inflation rate to exceed 2 per cent in the second half of the year.

But rather than be concerned about this and respond by paring back its stimulus measures, Mr Allen-Reynolds expects the ECB “to look through this, as inflation is likely to fall next year”.

“Supply problems should be resolved, holiday and clothing prices should have largely recovered to pre-crisis levels, and energy inflation will fall,” he said.

“Meanwhile, the hit from the pandemic to employment, incomes and confidence should mean that aggregate demand remains weak. So the ECB will keep policy loose to support the recovery.