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18 June 2015

Up In The Air 

After months of fears that a falling energy prices would plunge the continent into a deflationary spiral, European policy-makers are breathing easier with the publication of figures suggesting a slight uptick in inflation.

EU statistics office Eurostat says that consumer prices in the 19 countries that use the euro grew by 0.2% in May as food, tobacco and services became more expensive. The fall in oil prices appears to have ended, at least for now, although fuels continue to edge lower.

There was also a 0.1% increase in what Eurostat calls “core inflation,” which excludes the more volatile components of unprocessed food, energy, alcohol and tobacco prices.

The story is similar in non-eurozone Britain, where the consumer price index rose by 1% last month. It had fallen by that amount in April, indicating the UK’s first bout of deflation for more than half a century.

Although inflation has returned, it remains subdued. Prices in the eurozone have increased by just 0.3% over the 12 months to the end of May. Across the world, central banks are keeping interest rates close to zero, and several are charging commercial banks to place funds on deposit.

The risk of deflation in Europe was what prompted the European Central Bank to launch a wide-ranging programme of government bond purchases in March in order to pump money into the eurozone economy.

While the return of inflation is welcome, the central bank is unlikely to declare victory and start scaling back the bond-buying scheme until it sees more sustained progress toward its forecast of 1.5% price growth in 2016.