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Euro zone inflation well above expectations in May

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Euro zone inflation well above expectations in May
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By Robert-Jan Bartunek and Balazs Koranyi

BRUSSELS/FRANKFURT (Reuters) – Euro zone inflation jumped by far more than expected in May on higher energy costs, bringing relief to the European Central Bank after market turbulence that has jeopardised its planned exit from a lavish stimulus programme.

Inflation in the 19 countries sharing the euro rose to 1.9. percent from 1.2 percent in April, EU statistics office Eurostat said on Thursday, well above expectations for a 1.6 percent increase, as surging oil prices quickly fed through to consumers.

Excluding volatile energy and unprocessed food prices, inflation was 1.3 percent, from 1.1 percent in April. Another core inflation measure, also excluding alcohol and tobacco, was 1.1 percent in May, from 0.7 percent in April.

The ECB has a mandate to keep inflation below but close to 2 percent, a task that has proven challenging, even with economic growth on its best run in a decade. The ECB has spent months setting up markets for an end to its 2.55 trillion euros (2.25 trillion pounds) bond purchase scheme.

However, Italy’s political crisis risks reigniting market turbulence on the bloc’s periphery and derailing a the bank’s exit strategy.

Indeed, ten-year Italian yields <IT10YT=RR> surged to a four-year high this week with Spanish, Portuguese and Greek yields also moving higher. The ECB has already amassed 2 trillion euros worth of sovereign debt and will stay in the market at least until the end of September.

But policymakers have long argued that the ECB’s mandate is to oversee inflation, not help troubled countries, suggesting little appetite now to give up plans to normalise policy.

ECB board members Benoit Coeure and Sabine Lautenschlaeger both made the case in recent days for ending the bond purchases this year and Thursday’s inflation data are likely to support their case.

While policymakers tend to look past oil price shocks, some of them privately argue that the inflation rise over the coming months may bolster their case to end the bond buys even if they know the surge is temporary and the actual inflation picture is more benign.

The ECB will next meet on June 14 when it publishes fresh projections but a decision on whether to wind down the asset buys is more likely to come at the July 26 meeting.

While investors are near unanimous in expecting the ECB to end bond purchases by December after a short taper, forecasts for the bank’s first rate hike have shifted quite sharply in recent weeks, from around next April to possibly as late as September.

Eurostat’s first estimate of inflation does not include a month-on-month figure.

In a separate release, Eurostat said unemployment in the euro zone fell to 8.5 percent in April from an upwardly revised 8.6 percent in March. A Reuters poll of economists had on average expected a drop to 8.4 percent.

(Reporting by Robert-Jan Bartunek; editing by Philip Blenkinsop and Toby Chopra)

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