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Tags: Europe | Economy | Inflation | Jobs

Eurozone Inflation Rise Eases Pressure on ECB

Friday, 29 November 2013 09:39 AM EST

Welcome news on inflation and unemployment on Friday will ease pressure on the European Central Bank to act again next week to help the 17-country eurozone economy. But they do little to ease longer-term worries over the recovery.

Eurostat, the EU's statistics office, said the number of unemployed in the eurozone fell for the first time in two and a half years in October and that consumer prices were up 0.9 percent in the year to November.

The inflation rate was up from October's 0.7 percent rate and slightly ahead of market expectations for 0.8 percent. Most importantly, the increase will ease some concerns that the eurozone is about to face a debilitating period of falling prices, also known as deflation.

Still, inflation remains well below the ECB's target of just under 2 percent. It was the sharp fall in October that spurred the central bank this month to cut its main interest rate to a record low of 0.25 percent.

The fall in inflation to a near four-year low had raised fears of deflation, an economic condition that has blighted Japan for the best part of two decades — falling prices can cause a protracted slide in consumer spending as individuals postpone spending in the hope of getting a better bargain down the line.

Economists had predicted that a further fall in inflation could have pushed the ECB to act again at next week's monthly policy meeting. Now, they think it's more likely that the ECB will stay pat, especially as a separate survey pointed to some improvements in the labor market.

Frederik Ducrozet, an economist at Credit Agricole, said the rise in inflation "should buy the ECB more time to decide whether or not to provide more accommodation."

Separately, Eurostat said unemployment across the eurozone eased from September's record high of 12.2 percent to 12.1 percent in October.

Though the overall rate masks huge disparities across the eurozone, particularly among the young, Eurostat said that the number of people unemployed in the region fell by 61,000 to 19.30 million during the month. The fall, largely a result of declines in the largest economies of Germany and France, was the first since April 2011.

The figures showed labor market conditions in weaker countries like Greece and Spain remained tough. In Greece, unemployment at last count in August was 27.3 percent, while in Spain it stood at 26.7 percent.

Though Friday's figures may mean the ECB doesn't loosen its policies further next week, many economists think it will be forced to give the region's economy a further shot of support early next year.

Despite the rise in inflation in November, the specter of deflation hasn't gone away. Wage increase are muted due to high unemployment and the high euro, which makes imports cheaper, and the amount of spare capacity in the eurozone following the downturn of the past few years. Some countries, notably Greece, are already facing falling prices, a development that may make its debt servicing even more difficult.

Marie Diron, senior economic adviser at EY, formerly Ernst & Young, thinks policymakers at the bank need to be mindful of deflation.

"The ECB needs to recognise the risk of deflation more clearly and act pre-emptively," said Diron. She said the ECB should provide clearer indications that its interest rates will remain low for a long period of time.

Following its longest-ever, though not deepest, recession, the eurozone has now grown modestly for two quarters.

However, the tepid 0.1 percent quarterly growth recorded in the third quarter dashed many hopes that the recovery was picking up steam. It also highlighted the scale of the challenges facing a region still grappling with high debt, unemployment and exchange rate, which can weigh on growth by making exports more expensive in international markets.

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Welcome news on inflation and unemployment on Friday will ease pressure on the European Central Bank to act again next week to help the 17-country eurozone economy. But they do little to ease longer-term worries over the recovery.Eurostat, the EU's statistics office, said...
Friday, 29 November 2013 09:39 AM
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