Eurozone inflation leaps higher delivering 'headache' to ECB

Inflation in the eurozone leaped to the ECB's target in May, data showed on Thursday, fuelled by a huge increase in oil prices as the US decided to pull out of a nuclear deal with Iran. The EU's statistics authority, Eurostat, said inflation in the eurozone jumped to 1.9 percent in May, a sharp pick-up from the 1.2 percent recorded in April.
That puts inflation right at the European Central Bank's target of close to, but just below 2.0 percent. Analysts believe higher inflation will heap pressure on the ECB to end its massive stimulus programme that has helped keep government borrowing prices in Europe at super low levels.
This would be especially sensitive in heavily-indebted Italy, which is hit by a political crisis and closely benefits from the ECB bond-buying programme. "The drama in Italy creates something of a headache for the ECB," said Stephen Brown, European economist at Capital Economics.
"But provided that the situation remains contained, we doubt that it will prevent the ECB from bringing its QE programme to an end this year," Brown said, referring to the ECB's so-called quantitive easing programme. The strong jump in inflation was mainly due to energy prices, which shot up by a dizzying 6.1 percent in May compared to 2.6 percent the month before.
This comes as oil trades at 3.5-year highs amid concerns about supply disruptions caused by the United States' decision to quit the Iran nuclear deal, as well as unrest in Venezuela. But the potentially more significant news was that core inflation - which excludes food, energy, alcohol and tobacco - that also increased to an eight-month high of 1.1 percent.
Analysts said that while this could be due to seasonal factors, including an unusually high number of public holidays in May, it pointed to a tightening jobs market, which was also confirmed by data. Eurostat said Thursday the jobless rate in the single currency area fell to 8.5 percent in April, a nine-year low and down from 8.6 percent a month before. German unemployment dropped to a super-low 3.4 percent in April, with the Netherlands at 3.9 percent.
But Italy, where populist and extreme right parties are struggling to form a government, saw its rate rise to 11.2 percent with youth unemployment up to an alarming 33.1 percent. Bailed out Greece stood at 20.8 percent in February, the last month for which figures were available, with Spain dipping to a still high 15.9 percent.