‘Skewed’ inflation means eurozone QE could be unnecessary

‘Skewed’ inflation means eurozone QE could be unnecessary

Weak inflation data should not automatically lead to further support for the European economy this month, according to an outspoken group of experts.

The most recent estimate from Eurostat, issued last week, found eurozone inflation fell by 0.2 per cent compared to December 2013, largely driven by the dramatic fall in the oil price, which caused energy prices to drop 6.3 per cent.

Many commentators have said the data would increase pressure on European Central Bank (ECB) president Mario Draghi to announce a programme of quantitative easing (QE) at the central bank’s next meeting on January 22.

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But the effectiveness of any such support programme has been questioned by some experts, who also question the negative view of the inflation figures.

Samy Chaar, chief economist at Lombard Odier, said the news “looks more alarming than it really is” because the results were “skewed” by the oil price, which was a temporary occurrence and not part of “core” inflation.

He said core prices, which exclude energy, food, alcohol and tobacco prices, were “stable” at a 0.8 per cent rate of inflation, which was 0.1 percentage point more than in November.

Mr Chaar said in reality the eurozone was going through “good disinflation” because low energy prices should have a positive effect.

But he said the data still “makes the case for Mr Draghi to act” in order to “stabilise inflation expectations”, which he said was the key driver of inflation.

Paras Anand, head of European equities at Fidelity, said many people had interpreted the poor inflation figures as indicative of weak demand in the eurozone.

However, he thought a greater influence was what he called “cost-push factors”, such as a lower oil price potentially having a positive impact on the economy.

Mr Anand said the figures were likely to put more pressure on the ECB to embark on further support for the economy, in part because that was now what the market was heavily expecting and discounting into prices.

In contrast, his view was that any more support was unnecessary. With government bond prices so low and the euro weakening considerably, Mr Anand said further assistance could actually bring unintended negative consequences.

He said the risk was further support would take the pressure off the requirement for much-needed reforms across the bloc, crippling the eventual recovery of the eurozone.

Shaun Port, chief investment officer of Nutmeg, the discretionary wealth manager, agreed more support was unlikely to be announced this month, although his reasoning for this was largely because the ECB’s January meeting comes a few days before the Greek election on January 25.

Neil Williams, chief economist at Hermes Investment Management, said more stimulus from the ECB could be a “damp squib” and would not be the “panacea” to the region’s ills that some hope it could be.

He expected any measures from the ECB to be cautious, saying it would unlikely embark on the sort of open-ended QE seen in the US.