June 2, 2015 / 9:40 AM / in 2 years

Euro zone back to inflation as May prices beat forecast

BRUSSELS (Reuters) - The euro zone returned to inflation in May with a higher than expected increase in consumer prices after five months of falls and stagnation, due to rising food costs and the waning impact of cheap energy.

Jose Manuel Abel, 47, moves a pallet as he works at a fruit and vegetable warehouse in Munich October 10, 2013. REUTERS/Marcelo del Pozo

The European Union’s statistics office Eurostat said on Tuesday consumer prices in the 19 countries sharing the euro rose 0.3 percent year-on-year last month after a flat reading in April, beating market expectations of a 0.2 percent increase.

The Eurostat estimate does not contain monthly data, but the annual data showed that more expensive unprocessed food and services had the biggest upward impact on the overall index.

Excluding the volatile energy prices, which were 5 percent lower in May than 12 months earlier, consumer prices rose 1.0 percent.

Excluding energy and unprocessed food -- or what the European Central Bank calls core inflation -- prices were up 0.9 percent, a nine-month high, accelerating from a revised 0.7 percent in April.

“It was a positive surprise, especially the core figure,” said Teunis Brosens, economist at ING bank.

“It has been flat around 0.6-0.7 percent since September. Normally, I would not normally be interested in a 0.2-0.3 percentage point change in core inflation, but in the circumstances it’s good news,” he said.

The stronger than expected numbers came a day after data showed German consumer prices rising at their fastest in eight months in May.

The inflation rebound could mean that the ECB’s sovereign bond buying programme, called quantitative easing or QE, and launched in March with the aim of injecting more cash into the economy to prevent deflation, has brought rapid results.

This in turn will raise questions among economists whether the ECB needs to continue with the plan until its scheduled end date of September 2016.

“The ECB is clearly keen to dilute any market questioning of whether its quantitative easing programme will need to be fully implemented -- given improved euro zone growth and the exit from deflation -- thereby trying to keep downward pressure on the euro and euro zone bond yields,” said Howard Archer, economist at IHS Global Insight.

Prices at factory gates in April added some uncertainty to the inflation outlook, however, falling 0.1 percent month-on-month for a 2.2 percent year-on-year decline.

That was weaker than market expectations of a 0.1 percent monthly rise and a 2.0 percent annual fall.

Producer prices are an indication of inflationary pressure early in the pipeline, because unless their changes are absorbed by retailers via profit margins, they tend to translate into consumer prices.

Reporting by Jan Strupczewski and Philip Blenkinsop; Editing by Catherine Evans

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