Euro-Area Inflation Holds at 1.6%, Providing ECB Some Leeway

Euro-area inflation held steady in July after accelerating for two months, adding leeway for the European Central Bank to loosen monetary policy as the 17-nation currency bloc struggles to pull out of a record-long recession.

The annual inflation rate was 1.6 percent, the same as in June, the European Union’s statistics office in Luxembourg said today. That’s in line with the median of 42 economists’ estimates in a Bloomberg News survey. It’s the sixth straight month that the rate has been less than the ECB’s 2 percent ceiling.

“For the ECB, there is no major risk of inflation, but there’s also limited risk of deflation,” said Christian Schulz, senior economist at Berenberg Bank in London. “There’s economic adjustment going on in the euro zone as southern Europe is pricing itself into the market and becoming more competitive while Germany is enjoying the fruits of previous reforms and maybe spending a little more, driving up prices.”

The ECB’s Governing Council will keep its benchmark rate unchanged at a record low 0.5 percent when it meets in Frankfurt tomorrow, according to the median of 63 economist estimates in a Bloomberg survey. While the euro area has been mired in a recession for six quarters, some signs of a turnaround are emerging, including a return to expansion in manufacturing output and improved economic confidence in July.

Economic Outlook

After the central bank’s last policy meeting on July 4, ECB President Mario Draghi pledged to keep interest rates low for an extended period amid low inflation, a subdued economic outlook and weak credit flows. The ECB in June predicted the economy will contract 0.6 percent this year before growing 1.1 percent in 2014. Consumer prices are seen rising 1.4 percent this year, according to the ECB’s forecasts.

Euro-area unemployment held at 12.1 percent in June after May’s figure was revised lower to that level from 12.2 percent estimated initially, a separate report showed today. The number of people out of work fell to 19.3 million in June, down 24,000 from the previous month.

The euro was higher against the U.S. dollar after the data, trading at $1.3270 at 12:25 p.m. in Brussels, up 0.1 percent on the day. The Stoxx Europe 600 Index was 0.2 percent higher at 299.90.

Energy prices increased 1.1 percent in July after a 1.2 percent gain a month earlier, today’s report showed. Prices of food, alcohol and tobacco rose 3.5 percent, compared with 3.2 percent in June; while the cost of services increased 1.4 percent in the latest month.

Higher Prices

British American Tobacco Plc, Europe’s largest cigarette maker, said today that first-half operating profit rose 4 percent as higher prices offset falling consumption. Belgium-based Anheuser-Busch InBev NV, the world’s biggest brewer, reported quarterly profit growth that topped estimates on higher-priced beer in the U.S.

Fiat SpA, the Italian automaker that controls Chrysler Group LLC, said yesterday that it expects car sales to fall to about 1.3 million this year. Strong U.S. sales helped the Turin-based company post a better-than-expected second-quarter profit.

Before it's here, it's on the Bloomberg Terminal.