Eurozone inflation falls further below ECB target

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Eurozone inflation slipped further below the European Central Bank's near 2.0 percent target rate in June, largely due to a sharp drop in energy prices, official figures showed Friday.

Consumer price inflation in the 19-nation single currency bloc fell to 1.3 percent from 1.4 percent in May and compared with 1.9 percent in April, the official Eurostat statistics agency said.

Analysts surveyed by Factset had expected June inflation of 1.2 percent.

The fall in the headline June rate reflected a sharp slowdown in energy price increases, from 4.5 percent in May to 1.9 percent in June.

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Core inflation, which strips out volatile energy, food and beverage prices came in at 1.1 percent, up from 0.9 percent in May, Eurostat said.

Inflation is a key indicator of underlying consumer demand.

The ECB set its target rate of close to, but just below 2.0 percent with the aim of ensuring a modest but sustained increase in prices, the sign of a healthy economy.

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To achieve this, the ECB has set interest rates at historic lows and poured hundreds of billions of cheap euros into the banking system to stimulate activity.

Finally, after years of trying, the economy has shown signs of a modest but broad pick-up this year, leading to calls on ECB chief Mario Draghi to turn off the easy credit tap.

Draghi cautioned earlier this month that while he was confident of eventually hitting the bank's inflation goal, the ECB would remain "patient" and "persistent" in its efforts until it was clear the economy had fully turned the corner.

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Analysts said the June figures are unlikely to change Draghi's thinking. "The ECB will proceed with caution in normalising policy ...The data will add to the ECB's sense that reflationary pressures are appearing but core inflation is still well below two percent," Jennifer McKeown of Capital Economics said in a note.

The ECB may begin to reduce its stimulus programme next year, but the central bank "will keep saying that the pace of normalisation will be slow and that interest rate hikes are a long way off," McKeown added.

(Source: AFP)

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