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Euro zone jobless up, inflation at decade low

The jobless rate in the 16-nation currency area increased to 8.2 percent from an upwardly revised 8.1 percent in December, hitting a 28-month high, European Union statistics office said.

Eurostat also confirmed the euro zone’s January inflation at 1.1 percent, compared with 1.6 percent in December and 2.1 percent in November, the fall caused mainly by declining energy prices. Month-on-month, prices fell 0.8 percent.

Economists polled by Reuters had expected unemployment at 8.1 percent in the euro zone. A year ago, before the financial crisis began to harm the economy, the rate was at 7.3 percent.

“Rising unemployment will weigh down on euro zone consumer spending, especially as it will be liable to lead to slowing wage growth. This will more than counter the boost to purchasing power ... from sharply retreating inflation,” said Howard Archer, chief European economist at IHS Global Insight.

In the car sector and other industries, companies face stoppages and factory closures as a global credit crunch slashes financing to firms and families, choking demand.

Eurostat estimated some 13.036 million people were without jobs in the euro zone in January, 256,000 more than a year ago.

The highest jobless rate was in Spain, 14.8 percent, while the lowest in the Netherlands at 2.8 percent. In Ireland, unemployment jumped to 8.8 percent in January from 4.7 percent last year.

“The labour market downturn is still at a very early stage, with the unemployment rate likely to peak at around 10 percent at the end of next year,” said Nick Kounis chief European economist at Fortis.

Low inflation

Eurostat said that the annual inflation figure was dragged down by a 5.3 percent fall in energy prices. Among other falls, prices of transport declined 3.2 percent, communications 1.9 percent and clothes 0.6 percent.

“With energy inflation set to fall further too, we see the headline rate dipping into negative territory around the middle of this year,” said Jennifer Mckeown at Capital Economics.

Separately, Spain said its inflation rate fell to 0.7 percent year-on-year in February, its lowest level since June 1969, from 0.8 percent in January.

In Germany, the EU-harmonised index showed prices rose by 0.7 percent on the month in February. Year-on-year, they were up 1.0 percent, compared with a gain of 0.9 percent in January.

Analysts polled by Reuters expect the euro zone’s inflation in February to come at 1.0 percent year-on-year when Eurostat releases its flash estimate on Monday.

Both the unemployment and inflation figures boosted expectations that the European Central Bank will cut its interest rate in March, after it eased borrowing costs by a total of 225 basis points since October to 2.0 percent.

“The ECB will likely go for a 50 basis point cut as widely expected, but we expect further rate cuts in the future, seeing rates come down to half a percent by mid-year,” said Juergen Michels, economist at Citigroup.

The ECB wants to keep inflation below, but close to, 2 percent.