Eurozone inflation figures suggest the region’s economic backdrop is improving

2nd March 2015

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As the European Central Bank (ECB) gears up to kick-start its massive monetary stimulus programme, official figures show eurozone inflation is already improving.

While the currency bloc is still battling deflation, prices however have fallen by less than analysts had feared.

On Monday it was announced that the inflation rate for the year to February came in at -0.3%, which was not only better than the -0.5% which had been forecast but marked an improvement on January’s figure of -0.6%.

Once again the sharp drop in energy costs, at -7.9% versus a year ago, was largely responsible for the overall fall in prices. However, service sector prices rose by 1.1%, while food, alcohol and tobacco prices increased by 0.5%.

Ben Brettell, senior economist at Hargreaves Lansdown highlighted that falling energy costs should be of little concern to the ECB as they are essentially beyond its control, and in any case “should prove positive for the eurozone economy as disposable incomes rise”.

He said: “Core CPI inflation, which excludes volatile items such as food and energy, remained steady at 0.6%. This is still a worryingly low level, but the fact it didn’t fall further is mildly encouraging.”

Overall today’s statists are the latest in a series of signs suggesting the eurozone economy might have turned the corner.

Unemployment fell for the third month in a row to 11.2% in January – the lowest figure since April 2012.  During the month, the number of people out of work fell by 140,000.

Brettell added: “Meanwhile the latest figures showed the euro zone economy grew by a better-than-expected 0.3% in the final quarter of 2014, buoyed by 0.7% growth in its largest constituent, Germany. The credit cycle looks to be turning, and a weaker euro should benefit both exporters and domestically-focused firms.”

However Brettell cautioned that the ECB’s quantitative easing plan will do nothing to resolve Europe’s underlying structural problems, such as poor demographics, high debt levels and an inflexible labour market. He said: “However, if it coincides with a cyclical economic recovery, any positive impact will be reinforced.”

The finer details of the ECB’s €1 trillion plus QE programme, which is set to run from March until at least September 2016, are expected to be announced after the its policy meeting on Thursday.

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