European Inflation Held Steady in June

Euro-region inflation remained steady in June as energy costs retreated and a worsening debt crisis undermined economic growth.

The inflation rate in the 17-nation euro region rose 2.7 percent from a year earlier, the same as in May, the European Union’s statistics office in Luxembourg said today. That’s in line with an initial estimate published on June 30 and above the European Central Bank’s 2 percent limit for a seventh month.

European governments are stepping up spending cuts to fight the debt crisis, which is threatening to undermine economic growth. While energy costs retreated over the past months, the European Central Bank on July 7 raised borrowing costs for a second time this year. President Jean-Claude Trichet forecast inflation rates to “likely to stay clearly” above 2 percent.

“Inflation will continue to accelerate toward 3 percent over the coming months followed by a stabilization,” said Thilo Heidrich, an economist at Deutsche Postbank in Bonn, Germany. “It takes a while for a slowing economic dynamic to show an impact on pricing pressures and that’s why the ECB will be forced to raise interest rates further in October.”

The Frankfurt-based central bank last month forecast euro- region inflation to average 2.6 percent this year and 1.7 percent in 2011. Trichet said last week that risks to the inflation outlook remain “on the upside.”

‘Inflationary Pressures’

In Germany, annual inflation held at 2.4 percent in June. French consumer prices rose 2.3 percent from a year earlier, while increasing 3 percent in Italy and Spain. Greek inflation was at 3.1 percent and Portugal reported a gain of 3.3 percent. The statistics office didn’t publish an inflation rate for Ireland.

ECB council members have signaled concern that rising energy costs will feed into wage demands, entrenching inflation. While crude oil prices have retreated 9.2 percent over the past three months, they’re still up 7.3 percent this year.

“The Governing Council will continue to monitor very closely all developments with respect to upside risks to price stability,” the ECB said in its monthly report published today. It’s important that faster inflation “does not translate into second-round effects in price and wage-setting behavior and lead to broad-based inflationary pressures.”

Waning Sentiment

Companies may struggle to pass on higher costs as the euro- region recovery falters. European economic confidence dropped in June and manufacturing growth weakened. In Germany, Europe’s largest economy, investor sentiment dropped to a 2 1/2 year low. French business confidence also dropped in June.

The European Commission said in its quarterly report published yesterday in Brussels that the euro-region’s recovery “remains on track,” with growth “expected to slow down” and to “remain uneven” across member states.

While rising oil prices “generally damage growth, increases driven by higher demand tend to be less negative for growth than those driven by lower supply,” the report said. “Recently, both supply disruptions as well as higher world demand for oil appear to be at work.”

Euro-region core inflation, which excludes volatile costs such as energy and serves as a gauge for underlying price pressures in an economy, quickened to 1.6 percent in June from 1.5 percent in the previous month, today’s report showed.

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