There was a small glimmer of hope for Eurozone inflation in February despite the continued growth of the U.S. dollar against the euro and another fall in oil prices.
After experiencing a historically low core inflation rate in January, the 19-country European bloc saw core prices, which excludes energy and food, rise by 0.7 percent, according to inflation data released by Eurostat.com on March 17.
The core number represents a slight gain from the record low 0.6 percent from the month before
“I had expected (core inflation) to tick up higher somewhat later,” said Anna Grimaldi, a Senior Economist at Intesa San Paolo. “I think the main thing is how much it’s going to pick up in the coming months.”
It matched early March estimates and ran parallel with most economists’ expectations.
Headline inflation, or the Harmonized Index of Consumer Prices (HICP), which includes the volatile energy and food, fell 0.3 percent year-on-year. The HICP was 0.7 percent at this time last year.
Energy prices fell 7.9 percent, up from -9.3 percent n January.
Though prices virtually ticked up all around in February, the Eurozone can still be hopeful for more.
Fifteen of the 19 countries in the Eurozone experienced deflation in February, down from 17 in January.
And, in the coming months, the euro area will slowly begin to feel the effects of the stimulus package the European Central Bank implemented in January.
The first round of quantitative easing as part of the ECB package, which will pump $69 million in assets per month into the economy until September 2016, began on March 9.
The ECB began purchasing euro-denominated public sector securities in the secondary market and have continued to purchase asset-backed securities and covered bonds, which it began doing last year.
“We have already seen a significant number of positive effects from these monetary policy decisions,” said ECB President Mario Draghi in a statement during a press conference on March 5. “Financial market conditions and the cost of external finance for the private economy have eased further.”
February’s inflation report can be seen as a hopeful indicator for the ECB as it begins the upward climb to reach its inflation target level of just under 2 percent despite criticism from some economists’ that the stimulus is too modest.
John Devereux, who is a professor in economics at Queens College in New York, said, “it really does not matter” if the ECB reaches it’s target level anytime soon. It’s expected to come close with the effects of the QE, however modest, and the projected gradual rise in oil prices over the next few years.
Grimaldi, who said her perception of euro area inflation and growth has changed substantially since September due to the significant drop in the value of the euro and the implementation of the QE, doesn’t expect the Central Bank to reach it’s target any time soon—in the medium term—but acknowledged the commitment as a realistic goal.
“I do not expect inflation to go back to 2 percent,” she said. “I don’t think inflation is going back to 1.7 or 1.8 percent in 2017. It could probably stay lower but not that much lower.
“I think the ECB is committed to going back to the 2 percent target, and this is what counts for inflation expectations in the medium term.”
It’s too early to gauge the impact of the QE but it’s true that, with the stimulus, several other factors will have a significant impact on the mobility of the figure over the next several months, namely the QE, oil and the exchange rate.
“What we’re experiencing is a cyclical recovery and it’s much boosted by the decline in oil prices,” Grimaldi said. “From the Spring forward, we should be seeing an impact of the exchange rate as well, and we should start seeing the effect of falling interest rates and easier financial conditions for households and corporates on their spending decisions.”