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The European Central Bank’s Views on the Recent Inflation Slump

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Europe inflation expected to increase gradually

At its April policy meeting, the ECB (European Central Bank) maintained the view that EU (European Union) inflation could eventually reach its 2% target. Recent inflation data has not been encouraging, with inflation falling to 1.1% month-over-month in February. March inflation data was mildly positive, with annual inflation (WIP) rising to 1.3%, mainly because of food price inflation. While the ECB previously projected that inflation would hit 2% in 2019, it has a long way to go before meeting that target.

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The ECB’s views on underlying inflation pressure

After the meeting. the ECB admitted that underlying inflation metrics have remained subdued and have not shown any convincing signs of moving higher. Last year, euro (FXE) appreciation was blamed for stalling import inflation. Now, with the US dollar (UUP) appreciating in the last two months, euro (EUO) weakness could boost inflation expectations at the next review. ECB president Mario Draghi said that labor market reforms have boosted employment, resulting in household wealth growth.

The ECB’s outlook on Eurozone inflation

Draghi said that annual headline inflation is likely to remain near 1.5% for the rest of 2018, but increase gradually over the medium term, supported by monetary policy measures, an expanding economy, and rising wages. According to March 2018 projections, Eurozone (FEZ) inflation is expected to be 1.4%–1.7% through 2020. In the next part of this series, we’ll look at the ECB’s asset purchase program.

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