Euro zone July inflation hits record of 4.1 pct

BRUSSELS - Euro zone inflation jumped to another record high of 4.1 percent year-on-year in July as forecast, data showed on Thursday, but a bleak economic outlook may discourage a further interest rate increase this year.

By (Reuters)

Published: Thu 31 Jul 2008, 6:18 PM

Last updated: Sun 5 Apr 2015, 1:03 PM

Price growth in the 15-nation euro area accelerated from July's 4.0 percent, moving further above the European Central Bank's target of just below 2 percent, European Union statistics office Eurostat said in its flash estimate for July.

It was the highest inflation figure for the currency area since measurements started in 1997.

Analysts polled by Reuters had expected June inflation to rise to 4.1 percent, boosted by soaring energy and food prices.

"We do see a peak in inflation which was probably reached with 4.1 percent in July. Current oil prices suggest that inflation will be below 3.5 percent by the end of the year," said Holger Schmieding, economist at Bank of America.

Separately, unemployment in the euro zone unexpectedly edged up, in another sign of a slowing economy.

Eurostat revised up the jobless rate for May to 7.3 percent from a previous reading of 7.2 percent, and said the figure held stable in June. Economists had expected June unemployment to come in at 7.2 percent.

The economy is burdened by a strong euro, soaring prices of food and energy, tight credit conditions and an increasingly visible slowdown in other major industrialised countries.

ECB dilema

Economists said that although the high inflation figure could revive talk about a second ECB rate rise this year, the most likely scenario was for the bank to refrain from a hike.

"With oil prices off their peak and downward momentum in economic activity gathering pace, dampening inflationary pressures in the medium term, the most likely path for interest rates is to be on hold for the rest of the year," said Martin van Vliet, economist at ING Bank.

The ECB's policymakers stress the importance of anchoring inflation expectations.

"Our first priority is to curb inflation," ECB Governing Council Member Nout Wellink said in an interview published on Thursday before the inflation data was released.

Guy Quaden, also on the bank's Council, said in the same interview: "... it is important that the inflation expectations in the medium term remain anchored to our target."

The ECB increased its main interest rate by 0.25 percentage point to 4.25 percent in early July.

The ECB wants to limit the impact of growing energy and food costs on prices in the wider economy, trying to prevent what it calls a wage-price spiral.

"It is clear that the ongoing growth stagnation is already taking care of the core components of inflation," said Aurelio Maccario, chief euro zone economist at UniCredit.

Eurostat's inflation estimate contained no monthly data or detailed breakdown but separate country data has shown inflation in Germany, the euro zone's biggest economy, holding steady at 3.3 percent, the highest level since December, 1993.

Italy said on Thursday its inflation sped up to a record 4.1 percent in July year-on-year from 4.0 percent in June.

In Spain, a one-time boomer hit by a housing bust, inflation in July climbed to 5.3 percent from 5.1 percent in June, the highest since records began in January 1997, while Belgian July inflation hit a 24-year high of 5.9 percent.

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