Sharp euro zone inflation drop, record joblessness add to ECB conundrum

Reuters, Thursday 31 Oct 2013

European Central Bank under pressure after Euro zone inflation drops to nearly 4-year lows in October as unemployment remains high in September

Euro zone inflation dropped sharply to nearly four-year lows in October and unemployment stuck at record highs in September, increasing pressure on the European Central Bank to do more to protect economic recovery.

Inflation fell to 0.7 percent year-on-year in October - the lowest reading since November 2009 - a flash estimate from the European Union's statistics office showed on Thursday. It was lower than any forecast from economists in a Reuters poll.

The inflation rate dropped below 1 percent for the first time since February 2010. Analysts had expected the inflation rate to be unchanged at 1.1 percent in October.

The ECB, which meets next Thursday, wants to keep inflation below, but close to 2 percent over the medium term. Its main refinancing rate is now already at a record low of 0.5 percent.

"We see December as the most probable timing for a 25 basis points cut in the refi rate, in tandem with another round of low staff projections for inflation, including for 2015," Ken Wattret, chief euro zone market economist at BNP Paribas said.

The 9.5 trillion euro economy of 17 countries sharing the single currency returned to growth in the second quarter but fiscal consolidation, high unemployment and weak business and consumer confidence are preventing a more robust rebound.

Adding to factors in favour of a rate cut was the strength of the euro, which has been appreciating since early September, although on the day the inflation data and increased chances of a rate cut sent to euro lower to 1.3660 against the dollar from 1.3690.

Eurostat said that costs of food, alcohol and tobacco products rose by 1.9 percent, but at the same time prices of energy fell 1.7 percent year on year. Excludes prices of energy, food alcohol and tobacco, inflation slowed to 1.1 percent year-on-year from 1.4 percent in September, Eurostat said.

Record high unemployment

Price growth is also kept in check by record high unemployment. Eurostat previously reported that the number of people out of work fell to 12.0 percent of the workforce in August, raising hopes of a turnaround in the labour market.

But on Thursday it revised the August number up to 12.2 percent and said the rate had not changed in September. In absolute figures, the number of people without work even increased by 60,000 in September against August to 19.447 million people.

The global financial crisis, followed by European sovereign debt crisis wiped out hundreds of thousands of jobs over the past four years and no swift turnaround is in sight as job problems in Europe are of structural and long-term nature.

Young Europeans, aged 15-24, are the ones most affected. Youth jobless rates in European Union countries like Spain, Greece and Croatia are above 50 percent. They are below 10 percent only in Germany and Austria.

European Commissioner for Employment Laszlo Andor, in reaction to the September data, said the rate was unacceptably high and continued to undermine a more robust economic recovery.

The unemployment rate in Germany edged lower to 5.2 percent after being flat for three consecutive months, while the second largest economy France and third largest Italy registered a modest increase in their jobless rates in September.

European leaders made the fight against high unemployment one of key priorities. The ECB also considers the unemployment rate unacceptably high as Europe risks losing a generation of young workers if it fails to address the problem and revive growth. "The latest figures put a dent in hopes that the labour market may have reached a turning point," Ben May, European economist at Capital Economics said.

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