Eurozone consumer prices rose for the first time in six months during May, a significant victory for the European Central Bank in its campaign to avert a slide into deflation that could have derailed the currency area's fragile economic recovery.
Still, analysts said that the improvement in inflation--which is still far below the ECB's target--won't be sufficient to alter the bank's plans to pump over EUR1 trillion ($1.09 trillion) into the eurozone economy in EUR60 billion monthly increments until at least September 2016.
The 0.3% rise in prices wasn't solely due to a rebound in energy costs, and there was some evidence that strengthening consumer demand is raising the prices of other goods and services. That will encourage the ECB in its struggle to meet its inflation target of just below 2%.
Excluding prices for energy, food and alcohol that are largely beyond the ECB's influence, inflation picked up. The core annual rate jumped to 0.9% from a record low of 0.6%. Services prices rose by 1.3% on the year, having increased by 1.0% in April.
"What this tells us is there was never really deflation in the way most people understand it, a sustained fall in prices due to weak demand," said ABN AMRO economist Nick Kounis. "We're more in a situation of lowflation."
After a long, steady decline in the inflation rate, consumer prices first fell below their levels of a year earlier in December. The next month, the ECB announced the launch of a program of quantitative easing, under which it would buy more than EUR1 trillion of mostly government bonds. It launched the program in March.
Members of the ECB's governing council will likely feel some relief when they gather for their fourth policy meeting of the year Wednesday. When consumer prices are too weak or fall outright, it makes it harder for households and businesses to service their debts and could spur consumers to delay spending in hopes they they'll get a better deal if they wait.
In a monetary union such as the eurozone, which has 19 countries, modest inflation makes it easier for individual economies to regain competitiveness against their stronger peers by keeping inflation low while avoiding the negative consequences of deflation.
But the ECB officials will likely to stress that completion of the program of bond buys in full will be necessary to meet their inflation target. The bank said after its last meeting in April that it would keep buying bonds until it saw a "sustained adjustment" in inflation consistent with its 2% target, suggesting officials won't be spooked by any near term spikes in the inflation rate.
"The ECB remains resolute in its determination to go all the way down its Quantitative Easing road," said IHS Global Insight economist Howard Archer in a research note Tuesday.
Investors will also closely eye the quarterly inflation forecast that the ECB is due to deliver at its regular news conference on Wednesday.
Crédit Agricole economist Frederik Ducrozet said that the higher May inflation reading "makes a strong case for an upward revision to this year's staff forecast for inflation." In March, the ECB said that it expected inflation to be flat this year. Mr. Ducrozet said that while normally such an upward revision would be "hawkish", implying tighter policy, he said "there are many ways for the ECB to counter this with dovish signals."
For example, he said the long-term inflation forecast would likely stay unchanged and that this is "more important" than the short-term forecast. Moreover, the forecast for economic output could also be lowered.
In March, the ECB said that it saw inflation at 1.5% in 2016 and 1.8% in 2017.
Other analysts also see limited inflationary pressure. "Despite improving eurozone growth, underlying inflationary pressures across the region look set to be limited for some considerable time to come because of the constraining effects of extended muted economic activity, large output gaps in many countries and still relatively high unemployment," said Mr. Archer.
Some of the rebound in the index of consumer prices was due to energy. Over the 12 months to May, energy prices fell by 5.0%, compared with 5.8% in the 12 months to April. Were energy prices to resume their fall, deflation could once again threaten the eurozone.
