BRUSSELS/FRANKFURT (Reuters) – Euro zone inflation slowed more than expected last month, a growing headache for European Central Bank policymakers who already worry that price growth is ‘uncomfortably below’ their target.
Inflation in the 19 countries sharing the euro fell to 1.2% in May from 1.7% in April, missing expectations for 1.3% and more than reversing a one-off surge related to the timing of Easter.
Sign - Inflation - Prices - Food - Energy
In a potentially more worrisome sign, underlying inflation or prices excluding volatile food and energy prices, the ECB’s preferred measure, fell to 1.0% from 1.4% a month earlier.
The ECB targets inflation at just below 2% but has undershot this since 2013, raising fears that such a persistent miss could permanently lower inflation expectations, making weak price growth self perpetuating.
Minutes - Bank - Meeting - Concerns - Inflation
Indeed, the minutes of the bank’s last meeting already showed growing concerns about weakening inflation expectations, which then raises pressure on policymakers to provide further stimulus.
But the bank has already exhausted much of its firepower and while it still has plenty of tools left, they lack the potency of earlier measures, such as massive asset purchases or rapid rate cuts.
Demand - Companies - Labor - Costs - Consumers
“Despite decent domestic demand, it appears that companies continue to find it difficult to pass on their higher labor costs to consumers,” Commerzbank said in a note to clients. “The ECB is...
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