European Inflation Accelerates on Soaring Oil as Business Confidence Drops

European inflation accelerated to the fastest pace in two and a half years and confidence in the economic outlook declined as surging energy prices threatened to undermine growth.

Inflation in the 17-nation euro region quickened to 2.8 percent in April from 2.7 percent, the European Union’s statistics office in Luxembourg said today in an initial estimate. Economists had expected inflation to remain unchanged, according to the median of 34 forecasts in a Bloomberg News survey. An index of executive and consumer sentiment slipped to 106.2 from 107.3 in March, the sharpest drop since May 2010, and unemployment held at 9.9 percent, separate reports showed.

Crude-oil prices have soared 38 percent in the past six months, pushing inflation above the European Central Bank’s 2 percent limit and prompting policy makers to raise interest rates this month for the first time in almost three years. At the same time, higher raw-material costs are weighing on consumption and company profits, just as governments across the region cut spending to narrow budget deficits.

“The inflation numbers support the view that the ECB will deliver another interest rate hike before long,” said Aline Schuiling, senior economist at ABN Amro Bank NV in Amsterdam. “Growth was exceptionally strong in the first quarter, but will slow from here. The labor market is still very sluggish and paired with inflation that’s not good for purchasing power.”

German Output

The euro was little changed after the data were released, trading at $1.4867 at 11:31 a.m. in Brussels, up 0.2%.

European services and manufacturing growth unexpectedly accelerated in April, driven by higher output in Germany and France, the region’s largest economies. Still, European investor confidence declined as faster inflation and higher interest rates may hurt the recovery. Euro-region growth will slow to 1.6 percent this year from 1.8 percent in 2010, the European Commission forecast last month.

A gauge of sentiment among euro-region manufacturers slipped to 5.8 in April from 6.7 in the previous month, the European Commission said today. Services confidence dropped to 10.4 from 10.8 and an index of consumer confidence eased to minus 11.6 from minus 10.6. Sentiment among builders rose to minus 24.2 from minus 25.4.

Debt Crisis

Capacity utilization rose to 81.3 percent in the second quarter from 80.3 percent in the previous three months, the commission said.

As governments from Ireland to Spain cut spending to contain a sovereign debt crisis, eroding consumer and investment spending, European companies have relied on faster-growing markets to bolster sales. Volkswagen AG (VOW), Europe’s biggest automaker, this week reported record operating profit in the first quarter on stronger demand from China.

An indicator of manufacturers’ export order books jumped to 0.6 from minus 0.7 in March while a gauge of production expectations slipped to 15.7 from 17.9. Companies’ confidence in their ability to hire workers eased, with a gauge of employment expectations dropping to 7.2 from 8.6.

About 15.6 million people were unemployed in March, down 9,000 from the previous month, today’s report showed. In the 27- nation EU, unemployment remained at 9.5 percent. At 20.7 percent, Spain had the highest jobless rate and the Netherlands the lowest, with 4.2 percent. Nine EU member states reported a drop from a year earlier, while four had an increase in unemployment.

‘Significant Sales’

Closely held automotive supplier ZF Friedrichshafen AG plans to create 5,000 jobs by the end of this year, including 2,000 in Germany, on expectations of “significant sales and profit growth,” Chief Executive Officer Hans-Georg Haerter said on April 21.

Puma AG, Europe’s second-largest sporting-goods maker, is targeting revenue of 3 billion euros ($4.5 billion) after first- quarter profit rose 7.2 percent, the Herzogenaurach, Germany- based company said on April 26. Puma will raise prices in the fourth quarter to adjust for higher raw-material costs, Chief Executive Officer Jochen Zeitz said.

An indicator measuring households’ assessment of price developments over the coming 12 months remained close to the highest level in almost three years, easing to 30.7 from 30.8, the commission said. A gauge of consumers’ willingness to spend on big-ticket items dropped to minus 25.4 from minus 24.1 and households grew less confident in their ability to save money. A gauge of euro-region manufacturers’ selling-price expectations slipped to 21.5 from 24.4.

Wage Demands

ECB officials are worried that workers will demand higher wages in compensation for rising costs. Germany’s Ver.di services union seeks 6.5 percent more pay for workers in the state of North Rhine-Westphalia, the country’s most populous.

Spanish inflation accelerated to 3.5 percent in April from 3.3 percent and retail sales plunged, just as the government is trying to steer Europe’s fourth-largest economy back to growth. Spain will unveil a crackdown on underground employment in an effort to shrink one of the region’s largest shadow economies, bolster tax revenue and reduce the Europe Union’s highest jobless rate.

The inflation rate in Italy, the euro region’s third- biggest economy, climbed in April to 3 percent, the highest in more than two years as the cost of energy rose.

‘Inflation Pressure’

At their May 5 meeting, the ECB’s Governing Council will have to weigh threats to economic growth with the risks of faster inflation and decide whether to signal an interest-rate increase in June. The Frankfurt-based central bank last month forecast euro-region inflation to average about 2.3 percent this year and 1.7 percent in 2012.

“The ECB’s benchmark rate is still too low in light of economic growth and inflation expectations,” Andrew Bosomworth, a fund manager at Pacific Investment Management Co., wrote in a guest commentary for Germany’s Boersen-Zeitung yesterday. “The ECB has to raise interest rates higher than markets expect to damp increasing inflation pressure in the euro region.”

Economists forecast two more quarter-point increases in the ECB’s benchmark rate to 1.75 percent this year, the median of 29 forecasts in a Bloomberg News survey shows. Eurostat will release a breakdown of April consumer prices including core rates excluding volatile costs on May 16.

To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net

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

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