Before ECB meet, euro zone inflation rises more than forecast

Euro zone inflation rose more than expected in August, official data showed on Thursday, just as the European Central Bank prepares to debate whether to tighten policy after 2-1/2 years of unprecedented stimulus.

Inflation in the 19-country currency bloc, targeted by the ECB at just below 2 per cent, accelerated to 1.5 per cent in August from 1.3 per cent, coming just ahead of expectations for 1.4 per cent on the back of higher energy costs, Eurostat said on Thursday.

Underlying inflation, or prices excluding volatile food and energy costs, a figure closely watched by ECB policymakers, held steady at 1.3 per cent, beating forecasts for 1.2 per cent.

While the figures may strengthen the case of conservative policymakers, who are pushing for the ECB to wind down its asset-buying next year, the ECB is also now dealing with a strengthening euro, which pushes down prices.

Launched 2-1/2 years ago when the threat of deflation appeared real and imminent, the ECB's 2.3 trillion euro bond purchase scheme is due to expire at the end of the year, and policymakers promised to decide this "autumn" whether to extend the purchases or wind them down.

The euro zone economy is now growing for the 17th straight quarter, but wage growth is still paltry and sizable slack in the labour market suggests that wage inflation, a vital ingredient for overall inflation, may be sometime away, an argument for some policymakers to continue with stimulus.

Indeed, unemployment held steady at 9.1 percent in July, Eurostat said separately, with France, Spain and Italy all above the euro zone average.

 

ECB MEETS

ECB policymakers will next meet on Sept. 7 and while few specific decision are expected, ECB President Mario Draghi could start laying the ground for the bank's next move for when they meet on Oct 26.

A complication is the euro's 13 percent rise against the dollar this year, which could dampen inflation by reducing the cost of exports, and may slow growth by making euro zone export more expensive.

Tightening policy would also make the euro more attractive.

Indeed, policymakers already expressed concern about the euro's appreciation when they met in July, the minutes of that meeting showed, warning about the dangers of an "overshooting" currency.

Sources told Reuters this week rapid gains by the euro against the dollar are worrying a growing number of policymakers at the ECB, raising the chance its asset purchases will be phased out only slowly.

Speaking at the U.S. Federal Reserve's Jackson Hole conference last week, ECB President Mario Draghi argued that while growth has taken hold, patience was still needed for inflation to rise to target.

He said that inflation will move towards target once growth accelerates and the so-called output gap closes but warned that "we have to be very patient" as low productivity growth and the labour market slack will take considerable time to be resolved.