–Core Inflation Smallest Y/Y Gain since Series Inception in Jan 1997

April: +0.5% m/m; +1.5% y/y

FRANKFURT (MNI) – Eurozone consumer prices in April were 1.5%
higher on the year, the steepest climb since December 2008, Eurostat
reported Tuesday, confirming its flash estimate.

On the month, the harmonized index of consumer prices increased by
0.5%, slightly more than most analysts had expected.

Excluding energy, food, alcohol and tobacco, consumer prices rose
0.3% on the month and were 0.8% higher on the year.

The ECB’s standard of core inflation (excluding energy and
unprocessed food) was 0.7% higher on the year, the lowest annual change
ever recorded since the series come about in January 1997, a Eurostat
spokesman confirmed. On the month, these prices were up 0.2%.

The categories with the largest annual gains were transport (+5.9%)
and alcohol and tobacco (+4.2%), Eurostat said. On the month, these
categories were up 0.8% and 0.4%, respectively.

The lowest annual rates were in recreation and culture (-1.0%),
communications (-0.6%), and food (-0.2%), Eurostat reported.

Among main components, the highest monthly rates were in clothing
(+3.2%), transport (+0.8%) and housing (0.6%).

While the weaker euro will accentuate price pressures from imported
commodities, rising unemployment and slowing wage gains should dampen
labor cost trends, limiting second-round inflation effects.

Moreover, oil prices have taken a nose-dive as investors question
the intensity of demand trends and rush to safe assets, which will
dampen energy price pressures.

Most investors expect Eurozone inflation to remain under control
over the medium term. The ECB’s Survey of Professional Forecasters this
month gave an average inflation forecast of 1.4%, with risks to the
downside. The median forecast for 2011 was still 1.5%, while the
forecast for 2014 was confirmed at 1.9%.

Despite worries about the potential inflationary impact of the
ECB’s bond-buying program, even ECB’s chief economist Juergen Stark,
known to be critical of the strategy, said Monday that “no inflationary
impulse will emanate from these additional measures.”

“[Inflation] is really not the problem we have” in the Eurozone,
agreed Council member Ewald Nowotny. “We have a problem of too slow
growth, unfortunately, but we do not have in the foreseeable future a
problem of inflation.”

The central bank has insisted since the start of the program that
its bond purchases would not change the monetary base and it is engaging
in the first of at least two liquidity draining operations today to
absorb injected liquidity. It intends to drain E16.5 billion.

–Frankfurt newsroom +49 69 720 142; e-mail: frankfurt@marketnews.com

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