Eurozone Inflation Expectations Rise

        By Paul Hannon
        The European Central Bank appears to be winning its battle to persuade households and consumers that inflation will pick up over coming months and years.
        The ECB last month ushered in a new era by launching an aggressive bond-buying program known as quantitative easing that will flood the eurozone with more than EUR1 trillion in newly created money.
        Consumer prices declined for the fourth straight month in March, but what the ECB feared most of all was that consumers and businesses would grow accustomed to falling prices, and adjust their behavior accordingly.
        Many economists and central bankers believe that falling prices don't by themselves constitute deflation. For that chronic condition to take root, consumers and businesses have to cut back on spending because they expect prices to fall further, the outcome being a decline in output and employment that pushes prices even lower.
        As Japan's experience with falling prices since the late 1990s has shown, once inflation expectations become "de-anchored" from the inflation target--in the ECB's case, just below 2%--it can be difficult to reattach them.
        That appeared to be a significant challenge for the ECB, since the annual rate of inflation had been falling since August 2012, and has been below the ECB's target for over two years. So people have had plenty of time to get used to the idea that whatever the inflation rate is now, it will be lower in a few months' time.
        In launching its program of QE, ECB President Mario Draghi made it clear that changing expectations was a key goal. In a press conference earlier this month, he said the launch of QE had stopped a decline in oil prices in the second half of last year from leading to wider falls in prices.
        "It's quite clear that our monetary policy stance avoided that risk," Mr. Draghi said.
        A monthly survey carried out by the European Commission and published Wednesday supports Mr. Draghi's claims. In January, consumers expected prices to fall over the coming 12 months, the first time that had happened since early 2010. They continued to expect falling prices in February and March, but now anticipate a rise in prices over the coming year.
        January also saw retailers and services providers adjusting their expectations to anticipate a decline in prices over the coming year. But that was a one-off, and both types of business now expect prices to rise. Only manufacturers still expect prices to fall over the coming 12 months, although at the slowest pace since November 2014.
        To be sure, the ECB isn't home and dry. Economists expect that figures to be released Thursday will show prices were unchanged from a year earlier in April. But while that would be another sign of progress, it's a long way from an inflation rate of just under 2%.
        (END) Dow Jones Newswires

        April 29, 2015 05:04 ET (09:04 GMT)

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