After 6 months of low consumer prices, prices finally increased in May in the euro zone. This marks a big victory for the European Central Bank (ECB) who worked hard in order to prevent deflation which could have negatively impacted economic recovery as well as the euro (EUR).
Despite this, analysts still showed cold feet by commenting that the inflation improvement was insufficient to reverse earlier plans by the ECB to pump 60 billion euros each month into the euro zone economy until September 2016, totaling a staggering 1 trillion euros.
Increased consumer demand for goods and services as well as a rebound in energy costs contributed to the 0.3% increase. This is likely to give the ECB the boost to realize its 2% inflation target.
Added to this, alcohol, energy and food, which do not fall under the ECB’s influence, saw an inflation increase. The core annual inflation rate hiked by 0.3% from a record low of 0.6% to 0.9%. Also, services prices continued their upward trend by posting a 1.3% hike after previously increasing by 1.0% in April.
In a statement by Nick Kounis, ABN AMRO economist, he said that it is clearly evident there was no deflation in the real sense but that instead, a decline in prices can rather be attributed to low demand.
In monetary unions such as the eurozone, modest inflation allows individual economies to spur and hence, to regain their competitive edge against stronger economies while at the same time avoiding the devastating effects of deflation.
Investors will be closely watching the quarterly inflation forecast which is due to be delivered later today by the ECB during its regular news conference. In March 2015, ECB had forecasted a 1.5% inflation rate in 2016 and 1.8% in 2017.
Meanwhile, a portion of the consumer prices index rebound can be attributed to energy where energy prices dropped by 5.0% over the last 12 months to May compared with the 5.8% drop in the 12 months to April. If the energy prices start to decline again, deflation could once again continue to threaten eurozone economies.