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Euro zone inflation accelerates in April on energy, services

Euro zone inflation accelerates in April on energy, services

Euro zone inflation surged beyond expectations last month, mild relief for the European Central Bank, even if much of the jump was likely related to seasonal effects due to the timing of Easter.

Inflation in the 19 countries sharing the euro accelerated to 1.7% in April from 1.4% a month ago, beating expectations for 1.6%, Eurostat data showed today.

More crucially, underlying prices excluding food and energy, a figure closely watched by the ECB, picked up to 1.3% from 1%.

This saw it erase a worrisome dip a month earlier and hit its highest rate since October on a jump in services costs.

The ECB targets inflation just below 2% but has undershot this for the past six years despite deploying an arsenal of conventional and unconventional tools to boost growth and prices.

But any relief from solid April figures is likely to be short lived as the ECB expects inflation to slowly sink this year and not hit its target over the next three years.

Indeed, the ECB has already announced plans to provide even more stimulus through a new round of ultra cheap loans to banks to help the economy, backtracking on earlier plans to normalise policy after years of extraordinary help.

It now expects interest rates to stay steady through the year but risks are skewed towards an even later lift-off as markets price no hike for the better part of the next two years.

The problem is that growth is faltering, mostly as Germany, the bloc’s powerhouse, struggles through an unexpected dip caused by weak export demand for its manufactured goods.

German growth could fall to just 0.5% this year, the Bundesbank said today, less than half of the euro zone’s rate, and there was no sign yet of a recovery taking hold.

Still, policymakers agree that weakness is merely a dip, not the start of a recession, and a recovery is likely coming in the second half of the year.

Supporting their argument, employment continues to rise and services remain robust, suggesting that weak external demand, partly caused by global trade tensions, were the chief culprit of the slowdown.

Separately, Eurostat said euro zone prices at factory gates eased 0.1% month-on-month in March for a 2.9% year-on-year rise, falling short of market expectations of a 0% monthly reading and a 3% annual gain.

Changes in producer prices are an early indication of trends in consumer prices, as they tend to be passed on by retailers and intermediaries to consumes.

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