The surge in the price of oil has pushed eurozone inflation above the European Central Bank’s target, but policymakers in Frankfurt are expected to ignore the rise as broader price pressures across the region remain weak. Headline inflation rose to 2 per cent in the year to June from 1.9 per cent in May, according to a preliminary estimate published by the European Commission’s statistics bureau, Eurostat, on Friday.
While that leaves inflation above the ECB’s target of just under 2 percent, officials are expected to maintain their exceptionally loose monetary policy. Friday’s inflation data will make little difference to the ECB’s reading of the economy./ If the effects of the oil price and higher food costs are stripped out, the figures present a picture of an economic zone still struggling to produce the sort of consistent rise in inflation seen as necessary to keep growth smooth. A core measure of inflation, also published by Eurostat on Friday, was just 1 percent, down slightly on the May figure of 1.1 percent. Central banks across the world tend to target headline inflation rates, yet policymakers must also examine any short-term spurts and set their monetary policies based on what they think price pressures will look like two or three years from now.
The ECB wants to see a consistent rise in broader, underlying price pressures before it ditches more of its monetary stimulus In the case of the oil jump, the impact on prices could be more deflationary than inflationary in the years ahead. A rise in the cost of oil can dent growth by cutting into demand for other goods and services, making it more difficult for businesses in other areas of the economy to raise their prices. Oil prices have risen from around $46 this time last year to $78.77 as of Friday afternoon UK time. The dollar is slightly weaker against the single currency than it was in June 2017, although the US currency has risen in value over the course of this year in part because of a divergence between the monetary policies of the more hawkish US central bank, the Federal Reserve, and an ECB that remains committed to keeping much of its stimulus in place.