Flash CPI figures out this morning for the Eurozone showed consumer prices rising by more than expected in the Euro area in May. Annual inflation in the Eurozone came in with a reading of 0.3% for May in the flash estimates. This compares with an annual rate of 0% in April. Consensus estimates in a Reuters poll were for a figure of 0.2%.
Core CPI, excluding energy, food and alcohol & tobacco, also came in above estimates in May at 0.9%, against expectations of 0.7% and higher than April’s 0.6% rate. The biggest downward pressure came from energy prices, which were down by 5% on an annual basis. Unprocessed food and services contributed with the biggest upward pressure, rising by 2.1% and 1.3% respectively in the flash readings.
The strong inflation numbers will be a welcome boost to the European Central Bank in its fight against deflation. Fears of a deflationary spiral similar to Japan’s were heightened at the start of the year after annual prices across the Eurozone fell for four consecutive months. If the flash estimates are confirmed in the final figures, this would be the first annual rise in prices across the Eurozone since November 2014.
The ECB in January expanded its asset purchase program to include Eurozone government bonds as one of the measures to boost growth and prices. Today’s figures might ignite fears with ECB hawks that quantitative easing runs the risk of stoking inflation. However, May’s producer prices, which came in weaker-than-expected at -2.2% year-on-year, demonstrates that downward pressures persist and the ECB is unlikely to change course until there is strong evidence of a sustainable recovery in the euro area.
The CPI data gave a double boost to the euro, which was already higher today on hopes that a deal will be reached soon on Greece’s stand-off with its creditors. The euro managed to break the 1.10 handle, rising to 1.1028 at mid-European session.