Eurozone inflation further above target at 2.8 pct

AP News
Posted: Apr 29, 2011 9:08 AM
Eurozone inflation further above target at 2.8 pct

Inflation in the 17 countries that use the euro crept up to an unexpectedly high 2.8 percent in April, official data showed Friday, keeping pressure on the European Central Bank to raise interest rates again later this year.

At the same time, measures of business and consumer optimism declined and unemployment stayed high _ presenting a mingled picture of the economy's future that could complicate the bank's work as President Jean-Claude Trichet, whose term ends Oct. 31, prepares to hand off to a successor.

Speculation about who will inherit the job has focussed on Bank of Italy head Mario Draghi, who has been publicly backed by France and Italy; EU leaders say a decision will be made in coming weeks.

The inflation figure published by Eurostat, the EU statistics agency, was up from 2.7 percent in March. Many analysts had expected the figure to remain the same this month.

Inflation has remained above the ECB's goal of just under 2 percent, largely due to higher oil and food prices. Although the bank expects the price bump to ease next year, it was concerned enough to start raising rates from record lows, with a quarter point increase to 1.25 percent on April 7.

Economists predict several more such increases by year's end.

While oil prices are the main culprit, "the underlying price trend also seems to have become somewhat stronger recently," said economist Ralph Solveen at Commerzbank. "Today's numbers will support those on the ECB council who are pushing for a quicker normalization of monetary policy."

Although the key interest rate is not far from its record low, the bank's move has aroused concern that higher borrowing costs may make it harder for financially troubled countries such as Greece and Ireland, which have received bailout loans to avoid default on their debts, and Portugal, which has asked for a bailout.

Those three countries are only a small fraction of the eurozone economy, however, and the bank is looking at strong growth and rising prices in Germany, which makes up 27 percent of eurozone economic output and has a powerful export economy led by autos and industrial machinery.

Higher rates are the central bank's chief tool in fighting inflation, but they can hurt growth if done at the wrong time. The bank must find one rate that works for all the countries of the eurozone, which gave up their independent interest rate policies when they joined the euro.

Other signs for the eurozone remained mixed Friday. Unemployment was steady at 9.9 percent in March. The rate was boosted by underperforming economies in several countries, particularly Spain, the fourth largest euro economy. It suffers from a record 21.3 percent joblessness rate in the wake of a collapsed real estate bubble, and 44.6 percent unemployment for people under 25.

Meanwhile, the EU's broad economic sentiment indicator fell significantly, by 2.3 points to 105.1, for the 27-member European union, weighed down by a sharp drop in Britain's services and retail sectors.

The index fell more moderately by 1.1 points to 106.2 for the eurozone, the second decline in a row. Most EU members recorded a dip, and the index remains firmly above its long term averages only in Germany, France and the Netherlands.