Eurozone inflation in big jump just as uncertainties mount

The buildings of the banking district are reflected in the river Main as the sun sets in Frankfurt, Germany, Monday evening, May 28, 2018. (AP Photo/Michael Probst)

LONDON — A big jump in energy prices has pushed inflation across the 19-country eurozone sharply higher and potentially paves the way for the European Central Bank to plot the end of its stimulus program.

However, amid a raft of uncertainties in Europe, the bank is likely to tread carefully in coming months. There are worrying signs that the eurozone economy is going through a weak spell, the region is on the brink of a trade war with the United States, and Italy and Spain are engulfed in political uncertainty.

Eurostat, the European Union's statistics agency, said Thursday that consumer prices were up by an annual rate of 1.9 percent in May, way ahead of April's 1.2 percent. That's the highest rate since April last year and brings the headline inflation rate up to the ECB's goal of just below 2 percent.

The rise, which was slightly more than anticipated, was largely due to the sharp jump in oil prices. Energy prices were up 6.1 percent in the year to May, more than double April's 2.6 percent.

Having spent years plotting to get inflation back to its goal, the ECB is now in an awkward position. The eurozone's economic growth slowed in the first three months of the year, to a quarterly rate of 0.4 percent, from 0.7 percent in the previous quarter. Ending its stimulus program could further weaken growth.

There are also concerns that the eurozone's debt crisis may flare up again amid political turmoil in Italy. The country is without a government and there are fears that another election may take place soon that will see anti-euro parties do even better.

"Be careful what you wish for, ECB," said Bert Colijn, a senior eurozone economist at ING.

However, underlying inflation remains benign and that may rein in expectations that the ECB will use its next meeting, on June 14, to announce an immediate reduction in its monetary stimulus efforts.

After stripping out the volatile items of energy, food, alcohol and tobacco, inflation only rose to 1.1 percent from 0.7 percent. The increase may suggest that lower unemployment is slowly leading to higher wages.

Eurostat said the eurozone's unemployment rate fell further in April to a near-decade low of 8.5 percent from 8.6 percent the month before. That's the lowest since December 2008, when joblessness was rising sharply during the global financial crisis. Unemployment fell by 56,000 during the month, to a total of 13.88 million.

Looking ahead, a potential worry for the ECB is that higher oil prices and a weaker euro, which raises the cost of imports, could push inflation above target this year, squeezing consumers' purchasing power and weighing on growth.

"The strengthening of inflation comes in a time of growing trade concerns and the Italian political deadlock continuing to weigh on sentiment," said Moritz Degler, an economist at Oxford Economics.

"In many ways this is a central bank's worst nightmare."

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