European data continued to send mixed messages to markets on Wednesday, with inflation dipping lower while the unemployment rate hit an eight-year low.
The data underlined concerns outlined on Monday by Mario Draghi, European Central Bank president, that weak underlying inflation will require a prolonged period of accommodative monetary policy.
Eurozone CPI falls
Eurozone consumer price inflation fell to an annual 1.4% per cent in May from 1.9% in April, according to preliminary estimates. This was weaker than the 1.5% forecast.
Earlier in the week, ECB chief Draghi told the European parliament in Brussels that "for domestic price pressures to strengthen we still need very accommodative financing conditions".
Unemployment at post-crisis low
Consumer confidence has remained fairly subdued in the eurozone, despite falling unemployment.
The eurozone unemployment rate fell to 9.3% in April from 9.4% in March, data on Wednesday showed. This was lowest rate in the post-financial crisis era.
Low wage growth has kept consumer spending in check, and is why consumer price inflation is now falling further behind the ECB's 2% target rate.
ECB to remain on hold
Following the data, Cathal Kennedy at Royal Bank of Canada said: "The ECB [is likely] to continue to stress that underlying inflation pressure in the euro area remains weak, despite strengthening growth, when it meets next week."
Although first-quarter growth at an annual pace of 2% outstripped that of both the UK and US and purchasing manager surveys point to continued robust activity in the services and manufacturing sectors, persistently low inflation remains a concern.
Higher inflation prompts interest rate increases which, in turn, drive investment and growth.
Markets react positively
The eurozone's low inflation environment has been kind on equity markets, however, which have performed strongly as the economic recovery has gained pace.
The pan-European Eurofirst 300 index has climbed 15.4% in the past year. Not so much for the euro, however, which has gained just 0.8% over the same period.
And most European markets were higher on Wednesday – the Eurofirst 300 up 0.5%, Germany’s Dax 0.7% higher and France’s CAC 40 up 0.4%.
Kennedy at RBC continued: "While we see an upgrade of the ECB’s economic assessment as likely, we think that it will maintain its overall dovish stance next Thursday."