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Euro-Region Inflation Rate at 2.7% for Third Month on Energy

Euro-area consumer prices increased 2.7 percent in February for a third month, prompting the European Central Bank to turn its focus to increasing price threats.

The inflation rate was in line with an initial estimate published on March 1, the European Union’s statistics office in Luxembourg said today. January’s rate was revised to 2.7 percent from 2.6 percent. Industrial output rose 0.2 percent in January from the previous month, a separate report showed.

The ECB, which aims to keep annual price gains just below 2 percent, signaled that it has done enough to fight the region’s fiscal crisis, with President Mario Draghi saying he sees “upside risks” to inflation. With the economy showing signs of stabilization and rising oil costs driving prices, economists including Howard Archer at IHS Global Insight in London expect the central bank to keep borrowing costs on hold.

“Higher oil prices mean that euro-zone consumer price inflation is likely to prove significantly stickier than had previously been expected, especially during 2012,” Archer said in an e-mailed note before today’s report. “The ECB seems likely to remain firmly on the sidelines in the near term at least on the interest-rate front.”

The euro pared losses after the data were released, trading at $1.3066 at 11:08 a.m. in Brussels, down 0.1 percent.

Volatile Costs

Euro-region core inflation, excluding volatile costs such as energy, held at 1.5 percent in February, the statistics office said. In the month, consumer prices advanced 0.5 percent. Economists forecast industrial output to rise 0.5 percent from December, according to the median of 33 estimates in a Bloomberg News survey. In the year, production dropped 1.2 percent after declining 1.8 percent in December.

Oil prices have gained 7.7 percent this year on concern that sanctions against Iran may lead to military conflict in the Middle East, where more than half of the world’s crude reserves are located. At the same time, the global economy is showing signs of regaining strength, fueling demand for oil.

Energy costs rose 9.5 percent in February from a year earlier, today’s report showed. Food prices increased 3.1 percent and alcohol and tobacco were 4.1 percent more expensive. Health costs advanced 2.3 percent.

‘Upside Risks’

Euro-region inflation may average 2.4 percent this year and 1.6 percent in 2013, the ECB said on March 8. It had previously forecast the inflation rate to average 2 percent in 2012. The economy may expand 1.1 percent in 2013 after shrinking about 0.1 percent this year, it projected.

Draghi said inflation risks “are seen to be broadly balanced with upside risks in the near term mainly stemming” from energy costs and higher indirect taxes, while the economy should “recover gradually.”

“We are slightly unnerved that the ECB is telling us that the euro-zone economy is emerging from the depths of recession and inflation faces an upside risk due to the tax rises resulting from fiscal retrenchment,” said Steven Barrow, an analyst at Standard Bank Plc in London. “While we don’t doubt administered prices will keep inflation elevated, we just hope that the ECB does not overplay this so that the market thinks rates can’t come down again or, worse still, could go up.”

With spending cuts and tax increases across the region weighing on consumer confidence and export demand, companies have been forced to eliminate jobs to help protect earnings. Euro-region unemployment increased to 10.7 percent in January, the highest in more than a decade.

U.S. Economy

Henkel AG, the German maker of adhesives and Soft Scrub cleaners, on March 8 reported fourth-quarter earnings that missed analyst estimates as growth in raw-material costs offset increased prices and lower spending. Adidas AG, the second-biggest sporting-goods maker, said earlier this month 2012 earnings will be held back by rising costs.

Still, signs of reviving global demand may help bolster the euro region’s recovery from a fourth-quarter contraction. In the U.S. economy, the world’s largest, service industries expanded in February at the fastest pace in a year. China’s manufacturing growth accelerated and a gauge for India showed sustained growth, indicating Asian economies gathering strength.

Euro-region output of capital goods rose 0.7 percent in January from the previous month, when it slipped 1.2 percent, today’s report showed. Production of intermediate goods and energy increased 0.2 percent and 1.4 percent, respectively. Output of durable consumer goods advanced 0.1 percent.

The statistics office is scheduled to release euro-region January export data on March 16.

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