Euro-area inflation stuck too low as ECB debates stimulus

[LONDON] Inflation in the euro area failed to pick up in September and underlying price growth weakened, keeping the European Central Bank waiting for the last chapter in the story of the region's recovery.

The 1.5 per cent annual increase in consumer prices was unchanged from August and fell short of estimates. Separate reports showed Italian inflation slowed, though France saw an improvement.

While euro-area confidence is booming, unemployment is slowly falling and the economy is set for the fastest growth in a decade, a sustainable pickup in prices remains a key element that hasn't appeared. That's crucial for the ECB, which aims for inflation just below two per cent - without stimulus support - and whose policy makers will decide on Oct 26 whether to start paring back bond purchases in 2018.

Core price growth - excluding volatile items such as food, energy and tobacco - weakened to 1.1 per cent from 1.2 per cent. Italian inflation slowed to 1.3 per cent from 1.4 per cent, while the rate in France increased to 1.1 per cent from one per cent.

Figures earlier on Friday highlighted that the dilemma of strong growth and weak price gains extends to the eurozone's biggest economy. Germany reported a drop in unemployment to a record low, just a day after publishing inflation data that showed consumer-price growth missed estimates.

One concern is the euro, which is up 12 per cent against the US dollar this year and could act as a drag on import costs. Producer-price inflation, generally a more volatile number, has cooled in recent months after picking up sharply since mid-2016.

The single currency was little changed at US$1.1794 after the euro-area data.

Bank of France Governor Francois Villeroy de Galhau played down the importance of the exchange rate in remarks on Thursday, saying it's offset by strong domestic demand, but still urged the ECB to be "pragmatic" in how it reduces the pace of bond purchases.

Inflation's return to target is "too slow", he said.

BLOOMBERG