Euro zone inflation at 6.5-yr high, sentiment dips

BRUSSELS - Euro zone inflation jumped more than expected in November to its highest in six and a half years and inflation expectations rose while economic sentiment worsened, highlighting the European Central Bank’s rate dilemma.

By (Reuters)

Published: Fri 30 Nov 2007, 6:31 PM

Last updated: Sat 4 Apr 2015, 11:23 PM

The European Union’s statistics office estimated that consumer prices in the 13 countries using the euro rose 3.0 percent year-on-year, up from 2.6 percent in October. That was the highest since May 2001, when inflation hit a record 3.1 percent. Economists had expected 2.9 percent for November.

Eurostat will not give monthly data and a detailed breakdown of the inflation estimate until Dec. 14, but economists said the jump was due to an acceleration in food and energy prices, with high inflation in Germany and Spain.

“Inflation risks are rising in the short term, while growth momentum is slowing in the longer term. It leaves rate policy in a deep impasse, with rates likely to stay unchanged for quite a few months,” said David Brown, chief European economist at Bear Stearns International.

The ECB, which meets on interest rates next Thursday, wants to keep inflation just below 2 percent over the medium term and has said it expected protracted price growth above its target.

A monthly European Commission survey also showed that inflation expectations among businesses and consumers rose in November and were well above long-term averages.

“Inflation will no doubt remain well above 2 percent over the next few months,” said Christoph Weil, economist at Commerzbank.

“The base effect resulting from oil prices will only disappear next spring. We see no serious threats to euro zone inflation in the medium term, though.”

Despite tough talk from the ECB on rising inflation risks, economists expect the bank to keep rates unchanged at 4.0 percent well into 2008 and some say the next move would be a rate cut as the euro zone economy slows next year.

“Once inflation starts to retreat and the economy shifts down a gear, the ECB will be forced to put interest rate hikes on the back burner for the time being. We still expect a first rate cut at the end of next year,” Weil said.

More evidence of the coming slowdown came in the Commission’s sentiment survey, which showed confidence in the euro zone falling more than expected to 104.8 points from an upwardly revised 106.0 in October.

Economists had expected a decline to 105.0. The weaker sentiment was caused by steep drops in confidence in the service sector, which produces more than two thirds of euro zone gross domestic product, consumers and the construction sector.

This offset rebounds in industry and the retail sector.

Eurostat confirmed on Friday that the euro zone economy rebounded sharply in the third quarter, expanding by 0.7 percent quarter-on-quarter and 2.7 percent year-on-year. The annual figure was higher than previously estimated.

It was driven mainly by household consumption, investment and inventory growth, which offset a negative contribution from net foreign trade.

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