Inflation in the euro area remained well below the European Central Bank’s goal as policy makers prepare to discuss unwinding stimulus.
Consumer prices rose at an annual pace of 1.3% in July, unchanged from the previous month, Eurostat reported on Monday. Core inflation, the measure that strips out volatile components such as food and energy, accelerated to 1.2%, the highest in three months.
While the report confirms ECB President Mario Draghi’s prediction that inflation would remain near June levels in the coming months, it also reinforces his assessment that, despite the region’s booming economy, there isn’t yet a self-sustained trend. Policy maker are gearing up for an autumn debate on the future path of ECB policy.
“They need to get a clear story for September or October to make the case of the exit and it’s not going to be easy because core inflation and wages will probably roughly be where they are now,” said Nick Kounis, an economist at ABN Amro in Amsterdam. “They have to make the case for tapering and that will be based on growth giving them confidence that inflation is going to come back, and that’s the story they will try to sell.”
So far, Draghi and his Governing Council discussion have steered away from a formal discussion about what will happen to the ECB’s 2.3 trillion-euro ($2.7 trillion) quantitative-easing program after its scheduled end in December. While policy makers’ guidance ties bond-buying to progress on the inflation front, the Italian has suggested that purchases could be pared without tightening the stance.
Officials will have ample time to ponder economic data and policy options ahead of their 7 September meeting, and probably even thereafter. A decision is more likely to come in October, people familiar with the matter told Bloomberg.
With most central bankers taking a break from public events as Europe heads into a month of summer vacation, the public discourse over monetary policy ahead will center on economic data.
Business and consumer confidence in the 19-nation region unexpectedly improved this month, and unemployment fell to 9.1% in June, the lowest since early 2009. A report on Tuesday is forecast to show output increased 0.6% in the second quarter.
The ECB is banking on the region’s robust recovery, now in its fifth year, to create price pressures -- an endeavour complicated by an appreciating currency. Until now, wages have been almost stagnant, and a Bloomberg measure of domestically generated inflation has slowed, while the euro has gained more than 11% against the dollar since the start of the year.
Draghi has the opportunity to discuss his assessment with at least 19 Nobel Laureates at a conference that starts on 23 August in Lindau, Germany, before he meets his international counterparts at the Federal Reserve’s Symposium in Jackson Hole, Wyoming.
US officials may arrive with some advice on the dos and don’ts of unwinding stimulus. The central bank sparked an uproar in markets in 2013 with a signal about reducing accommodation. It’s since stopped buying bonds and started to raise interest rates and plans to begin “ relatively soon” to build down the institution’s $4.5 trillion balance sheet.
Draghi has indicated that he’s in no rush to head down the exit path.
“We need to think. We need to have lots of information we don’t have today,” he said after policy makers’ July 19-20 meeting. “But let me give you the bottom line of our exchanges: Basically, inflation is not where we want it to be, and where it should be.”