Eurozone inflation steady but unemployment up

City A.M. Reporter
Eurozone annual inflation was unchanged in August while the number of people without jobs grew, data showed on Wednesday, adding to expectations that the next ECB interest rate move could be a cut rather than a hike.

EU statistics office Eurostat said inflation in the 17 countries using the euro was 2.5 per cent year-on-year in August, the same as in July, as expected by economists.

The European Central Bank wants to keep inflation below but close to two per cent, and economists had been expecting the bank to raise interest rates a third time this year to 1.75 per cent from 1.5 per cent to stem price pressures.

Eurostat said unemployment was 10 per cent in July, unchanged from an upwardly revised June rate, which was initially reported at 9.9 per cent.

But the number of unemployed in the euro zone rose by 61,000 in July against June to £15.757m.

"The latest data and surveys fuel belief that the ECB's ultimate next move may actually be to trim interest rates although it is likely to need sustained euro zone economic weakness to... do a U-turn," said Howard Archer, economist at IHS Global Insight.

No detailed breakdown or monthly figure was yet available. Fuller data will be published on 15 September.

"We think the stabilisation was the combined result of a decline in energy price inflation and a rise in the core inflation rate," said Aline Schuiling, economist at ABN AMRO.

"Looking forward, we expect inflation to remain well above the ECB's price stability goal this year, before falling below this level next year, as energy price inflation drops back noticeably while the rise in the core rate is restrained by the moderate level of economic growth," she said.

ECB President Jean-Claude Trichet said on Monday the bank was reviewing the risks to price stability, suggesting it could tone down its view on inflation pressures.

In its last staff projections, released in June, the ECB forecast euro zone inflation in a range of 2.5-2.7 per cent this year and 1.1-2.3 per cent in 2012.

"The latest euro zone inflation and unemployment data might add to expectations of possible future ECB interest rate cuts," said Jennifer McKeown, European Economist at Capital Economics.

The rise in the number of unemployed is likely to slow down wage growth and therefore help keep down underlying inflation, she said.

"These data should help to convince the ECB that its earlier fears of a sharp rise in inflation were unwarranted, perhaps opening the door to interest rate cuts in the not too distant future," she said.