Bloomberg News

Europe Inflation Holds at 3-Year High, Complicating ECB Task

November 16, 2011

(Adds euro trading in fifth paragraph.)

Nov. 16 (Bloomberg) -- European inflation held at the highest rate in three years in October, complicating the European Central Bank’s task of shoring up the economy as it fights the sovereign-debt crisis.

Consumer prices in the 17 nations using the euro increased 3 percent from a year earlier, the same rate of inflation as in September, the European Union’s statistics office in Luxembourg said today. That’s the biggest gain since October 2008 and in line with an initial estimate published on Oct. 31. Core inflation, excluding energy costs, held at 1.6 percent.

European companies may find it increasingly difficult to pass on higher costs as the euro-area economy edges toward a recession. While the ECB earlier this month unexpectedly cut its benchmark interest rate, it has resisted pressure to combat a worsening fiscal crisis by boosting its purchases of government bonds.

“There are major risks to the euro-zone outlook,” said Howard Archer, chief euro-region economist at IHS Global Insight in London. “We expect the ECB to respond to a likely euro-zone contraction by following November’s interest-rate cut from 1.5 percent to 1.25 percent with a further 25 basis-point reduction to 1 percent within the next couple of months.”

The euro was higher against the dollar after the data, trading at $1.3551 at 10:08 a.m. in London, up 0.1 percent on the day.

Inflation Forecast

The European Commission said on Nov. 10 that euro-area inflation may average 2.6 percent this year, compared with the ECB’s aim of keeping annual price increases just below 2 percent. The commission lowered its 2012 inflation forecast to 1.7 percent from 1.8 percent projected previously.

Crude-oil prices have declined 4.6 percent over the past year, leaving consumers with more money to spend as the region’s worsening sovereign crisis prompted governments to toughen austerity measures. In Portugal, which is cutting spending and raising taxes to meet terms of its international aid plan, the economy contracted in the third quarter.

European indicators suggest that the region’s economy continued to weaken after expanding just 0.2 percent in the third quarter, adding pressure on companies to lower costs. Euro-region manufacturing and services industries contracted in October and economic confidence slumped to the lowest in almost two years. Unemployment unexpectedly increased in September, pushing the euro-area jobless rate to 10.2 percent, the highest since June 2010.

‘Mild Recession’

With European leaders struggling to restore investor confidence, the ECB has been forced to resume purchases of covered bonds as well as offer banks unlimited cash for up to 13 months. ECB President Mario Draghi said on Nov. 3 that the economy is heading toward a “mild recession by the end of the year.”

“We expect the economy to contract significantly in the fourth quarter, and the recession looks likely to last into next year,” said Nick Kounis, head of macro research at ABN Amro in Amsterdam. “The question of exactly how deep and long the recession is depends on whether policy makers act decisively to contain the crisis.”

Euro-area consumer prices rose 0.3 percent from September, when they increased 0.8 percent, today’s report showed.

--With assistance from Kristian Siedenburg in Budapest. Editors: Jones Hayden, Andrew Clapham

To contact the reporter on this story: Simone Meier in Zurich at smeier@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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