Underlying inflation in eurozone remains stubbornly low

LONDON – Underlying inflation across the 19-country eurozone remains stubbornly low, official figures showed Friday, in what is likely to be a disappointment to policymakers at the European Central Bank who have been predicting a pick-up.

Statistics agency Eurostat said Friday that the core rate of consumer price inflation, which strips out volatile items like energy and food, fell to 0.9 per cent in the year to September. That’s down on the previous month’s 1.0 per cent and confounded expectations for a modest rise to 1.1 per cent.

The fall provides further evidence that recent pay increases, particularly in countries like Germany, have yet to fully feed through the economy by encouraging companies to raise prices.

The headline inflation rate, which includes all items, rose to 2.1 per cent from 2 per cent, but that was largely due to higher energy prices on the back of steadily increasing oil prices.

Though the headline rate is above the ECB’s goal of just below 2 per cent, rate-setters want to see a pick-up in the underlying rate to make sure inflation is sustainable and not reliant on external factors like the price of oil.

This week, ECB President Mario Draghi said he expected underlying inflation to rise as a stronger job market pushes up wages.

He cited annual growth in negotiated wages of 2.2 per cent in the second quarter, up from 1.7 per cent in the first quarter. He added that the central bank was increasingly confident that the pick-up in wages would continue because wage agreements often last two years or more.

The fact that the headline rate has increased has been enough for the ECB to rein in its stimulus policies.

In June, the ECB announced that its monthly bond purchase program would come to a halt at the end of the year. The program effectively involves the bank printing new money to stoke lending and, ultimately, inflation. But bank officials have stressed that interest rates will remain at their current record lows well into next year. Its main rate stands at zero.