European Central Bank officials confronting faster-than-expected inflation might also wonder if this is just the last stumble before their 2% target looms large.
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(Bloomberg) — European Central Bank officials confronting faster-than-expected inflation might also wonder if this is just the last stumble before their 2% target looms large.
While the 2.6% outcome for February released on Friday — and a still-stubborn 3.1% result for the so-called core measure — present grounds for caution, the downward momentum in consumer prices is getting harder to ignore.
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The slowdown has taken time, but a seventh consecutive report featuring dissipating pressure on the underlying gauge that strips out volatile elements such as energy points to a steady but relentless decline. The headline measure could fall to 2.2% as soon as this month, according to a nowcast by Bloomberg Economics.
Given such signals, almost exactly two years since the Russian invasion of Ukraine turned surging consumer prices into a global inflation crisis, some soothsayers in the euro zone are taking heart. They reckon the ECB, which unveils its first forecasts of the year on March 7, is set to reach a policy turning point soon.
“The ingredients for a return to the inflation target are already there,” said Evelyn Herrmann, an economist at Bank of America in Paris. “The new forecasts may even show core inflation at 2% in 2026. That would mean everything is signaling a return to the target — the only thing that’s lacking is trust in this forecast.”
The February numbers arrived in a week of mixed messages for the global economy. A day earlier, the Federal Reserve’s preferred gauge of underlying US inflation in January rose the most in a nearly a year.
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By contrast, a Group of 20 meeting of finance ministers ended with an acknowledgment that “inflation has receded in most economies” and that “faster-than-expected disinflation” could even take hold.
While the headline euro-zone number exceeded the 2.5% median forecast of economists, there was plenty else to offer reassurance to policymakers.
National data from the region’s four biggest economies all showed inflation either slowing markedly — as happened in Germany, France and Spain — or in the case of Italy, already stuck already well below 2%.
The overall report for the euro region also contained hopeful elements, according to Jamie Rush and Maeva Cousin of Bloomberg Economics.
“Importantly for the ECB, a modest part of the decline was driven by services price inflation — the bit of the basket policymakers have most influence over,” they wrote in a report.
With such data heading in the right direction, the ECB’s remaining doubts center on wages. A raft of pay deals are being negotiated in the euro zone at present, meaning that it’ll still take weeks or longer for officials to become fully confident that faster inflation isn’t getting entrenched.
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Until now, the evidence on that has been encouraging. In the fourth quarter, negotiated pay rose only 4.5%, down from a record of 4.7% in the prior three months, according to an indicator compiled by the ECB.
Officials in northern European countries such as Germany are staying cautious, but even their comments show how the argument has now shifted to the timing of a move to lower borrowing costs — for which the stars are increasingly aligning toward June.
“Even though it may be very tempting, it is too early to cut interest rates,” Bundesbank chief Joachim Nagel said Feb. 23. “The price outlook is not yet clear enough.”
By contrast, colleagues from southern European countries are already pushing for the ECB to be ready to act.
“March is the date when we have the largest amount of new data in front of us — some data may tell us to discuss interest rate cuts as soon as March,” Portuguese Governor Mario Centeno said in an interview in late February. “I’m not saying that it is likely, but we have to be open.”
The strength of inflation still on show in the February data do point to the risk of setbacks, as does the US report.
Even so, policymakers meeting next week are likely to be quietly confident that their shock medicine of unprecedented monetary tightening in the past year or so is doing the trick.
“The current disinflationary process is expected to continue,” ECB President Christine Lagarde told the European Parliament on Feb. 26. “But the Governing Council needs to be confident that it will lead us sustainably to our 2% target.”
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