Euro-Area Inflation Holds at Less Than Half ECB Ceiling

Euro-area inflation stayed below 1 percent for a second month, less than half the European Central Bank’s ceiling, underscoring the weakness in parts of the euro region’s economy.

The annual rate rose to 0.9 percent from 0.7 percent in October, the European Union’s statistics office in Luxembourg said in a preliminary estimate today. The median forecast in a Bloomberg News survey of 44 economists was for 0.8 percent. Separately, unemployment unexpectedly dropped to 12.1 percent.

The increasing inflation rate “is largely coming through because of base effects in energy,” said Guillaume Menuet, an economist at Citigroup Inc. in London. “Once these start to fall out of the calculation, it’s quite likely by the spring of next year we’ll have again more evidence of weakening price pressures.”

Today’s data mark the 10th straight month that the rate has been less than the ECB’s 2 percent goal. The central bank unexpectedly cut its key refinancing rate by a quarter point to 0.25 percent on Nov. 7 to prevent slowing inflation from taking hold in a still-fragile euro-area economy. ECB President Mario Draghi said at the time that the region needs record-low borrowing costs to combat a “prolonged” period of weak consumer-price growth and “very high” unemployment.

No Action

Euro-area unemployment unexpectedly fell to 12.1 percent in October from 12.2 percent a month earlier. Economists had predicted the rate would stay unchanged, according to the median of 34 estimates.

After this month’s surprise rate cut, ECB officials have said they still have options for easing monetary policy. Bloomberg News reported last week that policy makers are considering a smaller-than-normal cut in the deposit rate, currently at zero, to minus 0.1 percent, if stimulus is required.

For now, economists say the ECB won’t do anything when its rate-setting Governing Council meets on Dec. 5. Not a single economist in a survey of 37 sees the ECB changing its benchmark rate next week, while a separate poll of 25 also predicts the deposit rate will stay at zero.

“We’ll see again headline inflation starting to fall back,” Citi’s Menuet said. “For the ECB it means that the likelihood of additional monetary stimulus is quite significant. So we expect another 25 basis-point rate cut around the second quarter of 2014.”

Continued Disinflation

The inflation statistics showed that energy prices dropped 1.1 percent in November from a year earlier, after a 1.7 percent decline the previous month. Prices of food, alcohol and tobacco rose 1.6 percent, slowing from 1.9 percent in October, while the cost of services increased 1.5 percent.

The core inflation rate rose to 1 percent in November from 0.8 percent. Economists had forecast that it would increase to 0.9 percent.

“We expect the trend of disinflation to continue in the coming months, as a weak labor market, the strength of the euro and the sharp drop in wholesale food prices make their presence felt,” Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam, said before the report.

Today’s inflation data are estimates and the statistics office will release final figures for November on Dec. 17.

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