Sunday 20 January 2019

US jobs surge stark contrast to weakening Euro inflation

The ECB will struggle to succeed in its aim of getting inflation rates close to 2pc (stock photo)
The ECB will struggle to succeed in its aim of getting inflation rates close to 2pc (stock photo)

David Chance

Inflation in the eurozone fell sharply in December with the headline rate dropping to 1.6pc year-on-year from 1.9pc a month earlier, putting the European Central Bank's aim to raise interest rates in doubt.

Although falls in the price of oil were expected to drag down consumer price inflation, there were also falls in food, alcohol and tobacco while so-called "core inflation", which strips out volatile items like energy, remained stuck at 1.0pc in December.

The ECB will struggle to succeed in its aim of getting inflation rates close to 2pc. It may not be able to lift interest rates as planned, as that would depress inflation further.

This comes amid renewed concerns over the health of the global economy in the midst of a US/China trade row.

However, US jobs data yesterday showed that December was the best month since February with 312,000 new jobs added.

The world's largest economy created 2.6m jobs last year, more than previously thought and compared with 2.2m in 2017.

US stocks, bonds and the dollar all surged on the news.

The ECB has been predicting rising core inflation since it first made its forecasts public in December 2013, although core fell from that date to early 2015 and has only edged up to the 1.0pc level since.

That has raised the very real prospect it will not be able to lift rates before the next recession hits, leaving it with few tools to bolster demand.

While that may be good news for mortgage holders here, it is bad news for the economy overall which could as a result suffer a prolonged downturn.

Adding to the bleaker outlook, data provider IHS Markit revised down its estimate of private sector growth to a four-year low.

"Economic growth in the currency union has shifted down a gear and, with underlying inflation still low, it now looks likely that the ECB will wait much longer before raising interest rates," said Jack Allen, senior European economist at Capital Economics.

Irish Independent

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