Bloomberg News

Europe Inflation Slows Less Than Forecast

March 30, 2012

Retail sales in Germany, Europe’s largest economy, unexpectedly declined for a second month in February. Photographer: Hannelore Foerster/Bloomberg

Retail sales in Germany, Europe’s largest economy, unexpectedly declined for a second month in February. Photographer: Hannelore Foerster/Bloomberg

European inflation slowed less than economists forecast in March as rising energy costs countered the effects of a cooling economy.

The inflation rate in the 17-nation euro region fell to 2.6 percent from 2.7 percent in February, the European Union’s statistics office in Luxembourg said in an initial estimate today. While that is the lowest rate since August, it was above the 2.5 percent pace forecast by economists, according to the median of 39 estimates in a Bloomberg News survey.

The economy may struggle to gather strength as budget cuts and rising oil prices erode consumer spending and company investment. Retail sales in Germany, Europe’s largest economy, unexpectedly declined for a second month in February. While the European Central Bank (EURR002W) cut its key interest rate twice to a record low in the fourth quarter, the bank said on March 8 that short-term risks to price stability have moved to the upside.

“The chances of inflation falling durably below the ECB’s target have clearly dwindled,” said Martin van Vliet, an economist at ING Group in Amsterdam. “Interest rates will likely remain on hold next week, and in the coming months.”

Euro-region inflation may average about 2.4 percent this year and 1.6 percent in 2013, the ECB said on March 8. The Frankfurt-based central bank, which earlier this month left its benchmark rate at 1 percent, aims to keep annual gains in consumer prices just below 2 percent.

Rescue-Fund Firewall

European stocks extended the biggest first-quarter advance since 2006 and the euro gained while default risk fell as euro- area finance ministers met to increase the region’s rescue-fund firewall. The Stoxx Europe 600 Index (SXXP) added 0.7 percent as of 10:30 a.m. in London. The euro rose 0.3 percent to $1.3337 against the dollar.

Tensions in the Middle East are driving up energy costs, draining the purchasing power (EUGNEMUQ:US) of companies and consumers. Oil prices are up 6 percent over the past two months, bringing annual gains to 1.8 percent.

German retail sales fell 1.1 percent in February from the prior month, adjusted for inflation and seasonal swings, the Federal Statistics Office in Wiesbaden said today. Economists had forecast a 1.1 percent gain, a Bloomberg survey showed.

German companies may have more room to pass on higher costs with the economy projected to grow 0.6 percent this year, while gross domestic product in euro-area economies from Spain to Italy is seen declining, according to European Commission forecasts. Germany’s IG Metall labor union representing some 3.6 million workers has demanded 6.5 percent more pay.

Economic Rebound

In Japan, industrial production unexpectedly dropped in February, undercutting signs of an economic rebound in the first quarter as policy makers assess whether to apply further stimulus. Factory output slid 1.2 percent from the previous month, the Trade Ministry said in Tokyo today. The jobless rate fell to 4.5 percent and consumer prices excluding fresh food unexpectedly rose 0.1 percent, government reports showed.

In the U.S., the final reading for the Thomson Reuters/University of Michigan measure of consumer sentiment for this month is due and Canada will report gross domestic product for January.

Bundesbank President Jens Weidmann said on March 13 that the ECB will “react if inflation pressures arise” in Europe.

“We are constantly alert to threats to medium-term price stability,” ECB President Mario Draghi said on March 26. “Euro-area citizens can be certain that our objective is delivering price stability over the medium term and that we have all the necessary tools to achieve it.”

The statistics office is scheduled to release a breakdown of March consumer prices next month. Euro-area core inflation, which excludes volatile costs such as energy, held at 1.5 percent in February.

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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