Euro-area inflation cooled to the slowest in almost four years in October, moving further away from the European Central Bank’s goal.
The annual rate fell to 0.7 percent, the lowest since November 2009, from 1.1 percent in September, the European Union’s statistics office in Luxembourg said in a preliminary estimate today. The median forecast in a Bloomberg News survey of 42 economists was for the rate to stay at 1.1 percent. Separate data today showed unemployment was at a record 12.2 percent in September.
The data mark the ninth straight month that the rate has been less than the ECB’s 2 percent ceiling, and they prompted BNP Paribas SA and JPMorgan Chase & Co. to forecast an interest-rate cut by the ECB in December. The central bank, which will publish new economic projections that month, has said there is a “subdued outlook” for inflation in the 17-nation euro area.
“Today’s numbers should strengthen the case for more policy easing,” said Neville Hill, an economist at Credit Suisse Group AG in London. “Draghi may want to leave the door open to the possibility of a rate cut at the December meeting” when he holds his monthly press conference next week, he said.
The ECB will probably keep its key interest rate at 0.5 percent after a meeting of its Governing Council on Nov. 7, according to a Bloomberg survey of economists. The central bank has pledged to keep the rate at the current level or lower for an extended period.
The last time inflation was this low, the euro area was mired in a recession, companies were cutting costs and unemployment was rising. The region’s economy shrank 4.4 percent in 2009. While the economy resumed expansion in the second quarter and surveys have improved, unemployment is continuing to increase and the ECB predicts only a “gradual” recovery.
The ECB in September predicted inflation of 1.5 percent this year and 1.3 percent in 2014. In his forecast change, JPMorgan economist Greg Fuzesi said the data today raise “very big” questions about the outlook and the ECB’s response.
Ken Wattret, chief euro-area economist at BNP in London, said inflation is “persistently undershooting the ECB’s definition of price stability, which risks unanchoring inflation expectations on the downside.”
“The appreciation of the exchange rate is leading to an inappropriate tightening of financial and monetary conditions in the euro area,” he said.
The euro has strengthened about 4 percent against the dollar since early September and about 2 percent on a trade-weighted basis. The currency weakened 0.9 percent against the dollar today, to $1.3618 as of 2:53 p.m. London time.
Emergency Swap Lines
Central banks said today that emergency currency-swap lines established during the global financial crisis will be made permanent, providing backstops to safeguard against future turbulence.
In Asia, the Bank of Japan stuck with its campaign of unprecedented monetary easing, intended to jolt the nation out of a 15-year deflationary malaise. Governor Haruhiko Kuroda’s board maintained a pledge to expand the monetary base by 60 trillion to 70 trillion yen ($711 billion) a year.
Back in the euro area, the labor-market report showed that the jobless rate in August was revised to 12.2 percent from 12 percent previously. The jobless rate among those under the age of 25 was 24.1 percent in September.
The inflation statistics showed that energy prices dropped an annual 1.7 percent in October after a 0.9 percent decline the previous month. Prices of food, alcohol and tobacco rose 1.9 percent, slowing from a 2.6 percent pace in September, while the cost of services increased 1.2 percent.
The core inflation rate dropped to 0.8 percent in October from 1 percent, also surprising economists, who had forecast that it would remain unchanged.
“With energy-price base effects becoming less favorable in the coming months and some indirect tax increases in the pipeline early next year, the falling streak in inflation is probably nearly over,” said Martin van Vliet, an economist at ING Bank NV in Amsterdam. “However, euro-zone headline inflation is still set to remain well below the ECB’s target in the foreseeable future.”
Today’s inflation data are an estimate and the statistics office will release final figures for October on Nov. 15.
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