Euro-Area Inflation Held Steady in July After Economy Contracted

Euro-area inflation held steady last month after the economy slipped into contraction and as companies eliminated jobs to weather the fiscal crisis.

The inflation rate in the 17-nation single-currency bloc remained at 2.4 percent from a year ago, the same as in June and May, the European Union’s statistics office in Luxembourg said today, confirming an initial estimate published on July 31. Core inflation, excluding energy costs, quickened to 1.7 percent from 1.6 percent. That’s the fastest since April 2009.

The euro-area economy contracted 0.2 percent in the second quarter after stalling in the previous three months as governments stepped up budget cuts, undermining consumer and company spending. While crude oil prices have increased about 12 percent over the past two months, the European Central Bank in July cut borrowing costs to a record low, with President Mario Draghi on Aug. 2 calling inflation risks broadly balanced.

“Overall, there are no inflation threats for the euro region given the economic environment,” said Christian Melzer, an economist at Dekabank in Frankfurt. “The economy will continue to shrink in the third and fourth quarters, weighing on prices. We expect another interest rate cut in September.”

Euro-area consumer prices fell 0.5 percent from the previous month, when they dropped 0.1 percent, the statistics office said. In the 27-nation EU, inflation held at 2.5 percent. Inflation slowed in 12 member states, remained stable in one and quickened in 14, the statistics office said.

Easing Inflation

The ECB’s quarterly survey of professional forecasters showed last week that euro-area inflation may average 2.3 percent this year before weakening to 1.7 percent in 2013. The central bank aims to keep inflation just below 2 percent.

Signs of a deepening economic slump may leave companies with less room to pass on higher prices, forcing them to focus on cost cuts instead. The euro-area unemployment rate held at a record 11.2 percent in June. RWE AG, Germany’s second-largest utility, said Aug. 14 it will cut 2,400 jobs to lower costs.

Adding to signs of easing cost pressures across Europe, producer-price inflation slowed to 1.8 percent in June from 2.3 percent in the previous month. In Germany, Europe’s largest economy, producer prices probably increased 1.2 percent in July from a year earlier after rising 1.6 percent in the previous month, a survey of economists shows ahead of tomorrow’s release.

‘Appropriate Modalities’

The ECB on Aug. 2 kept its benchmark interest rate at 0.75 percent and said it’s ready to purchase government bonds in tandem with the region’s rescue funds to fight the fiscal crisis. Draghi said the ECB will design the “appropriate modalities” over the coming weeks.

Simon Grose-Hodge, head of investment strategy for Asia at LGT Group Ltd. in Singapore, said the announcement may pave the way for a “much larger scale of bond buying.”

“The comments from Draghi seem to suggest that there’s a new combined effort coming along between EU officials and the ECB,” Grose-Hodge told Rishaad Salamat on Bloomberg Television’s “On the Move Asia” on Aug. 15. “We know it may take many months for them to put it together and often we have to sit through a lot of delays but it does seem to be a significant change in the language Draghi is putting out.”

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