German inflation picked up in September to reach its highest level in 16 months and Spanish consumer prices rose for the first time since May 2014, positive signs for the European Central Bank that its ultra-loose monetary policy is working.
The ECB has unleashed unprecedented monetary stimulus in recent years to boost the economy and fight off the threat of deflation. It has cut interest rates aggressively to zero or less and pumped more than a trillion euros into the economy through asset purchases.
But with growth in the eurozone still moderate and inflation in the 19-member currency bloc barely above zero – well short of the ECB’s target of nearly 2% – the central bank’s critics say its monetary policy has reached its limits. Others say it should print even more money.
But yesterday’s number offered some respite for the policymakers.
“Hooray, the prices are rising! This might sound crazy but it fits. Because the price development shows that the risks of deflation have been averted for now,” KfW Bank economist Joerg Zeuner said.
The ECB has been concerned about a damaging deflationary spiral in the eurozone in which consumers delay purchases in expectation of lower prices, hitting economic growth.
Zeuner said he expected the German inflation rate – which is something of a key to eurozone inflation as a whole – to reach nearly 2% at the beginning of next year.
“Given a similar development in the eurozone, this will enable the ECB to aim for a smooth exit from its bond-buying programme in 2017,” he added.
German consumer prices, harmonised to compare with other European countries (HICP), rose by 0.5% on the year in September after an increase of 0.3% in August, the Federal Statistics Office said. This was the highest rate since May 2015 and in line with a Reuters consensus forecast. On a non-harmonised basis, German inflation picked up to 0.7% on the year after 0.4% in August, it said.
Energy prices remained the main drag on the headline figure, but fell less sharply than in the previous months, a breakdown of the non-harmonised data showed. Costs for rents increased faster than in August while food inflation slowed.
The strong German inflation data came after Spanish EU-harmonised consumer prices rose by 0.1% year-on-year in September, the first increase since May 2014. Spain’s national consumer price index rose by 0.3% in September on an annual basis, up from a 0.1% drop in August and the first time it has risen since July 2015, the National Statistics Institute (INE) said.
ING economist Geoffrey Minne called the Spanish inflation data “a sign that ECB policy might be working after all”.
But he added that overall eurozone inflation was still far away from the ECB’s target of nearly 2%. “In that regard ECB monetary policy is likely to remain easy for some time to come,” Minne said. For the overall eurozone, economists polled by Reuters expect the inflation rate, due today, to edge up to 0.4% in September after a rise of 0.2% in August. This would be the highest reading since October 2014.
In Berlin, leading economic institutes urged the ECB to wait and weigh the effects of its bond-buying programme before taking more expansionary steps. But they also added that the ECB should take more measures if inflationary pressures remained weak.
On Wednesday, European Central Bank President Mario Draghi rejected German criticism that sub-zero interest rates were impoverishing savers and straining top lender Deutsche Bank, saying its monetary policy was a necessity to get the euro zone back on the path to growth and revive inflation.
Questioned by lawmakers who say ECB policy has damaged the euro zone and fuelled the rise of right-wing populists, Draghi said Germans were actually net beneficiaries of the eurozone central bank’s easy stance and the nation’s bank troubles were actually due to poor efficiency.

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