August 31, 2012

Inflation, Unemployment Both Rise in Eurozone

Surprise inflation jump could affect interest rate decisions; joblessness sets record

Unemployed people waited at a career fair. (Photo: AP) Unemployed people waited at a career fair. (Photo: AP)

Inflation in the eurozone rose higher than expected, lessening the likelihood that the European Central Bank (ECB) would cut interest rates on Thursday. Unemployment also rose, setting a record for the currency bloc.

Reuters reported Friday that the European Union's (EU) statistics office in Luxembourg estimated that consumer prices in the currency bloc rose 2.6% year over year, more than expected and more than July’s 2.4%.

The ECB had expected the rate to drop under its 2% target ceiling by the end of the year. While it has fallen from its November 2011 level of 3% and held steady at 2.4% through May, June and July, thanks to a slowdown in the economy of the eurozone, the increase could affect the ECB’s policy decisions to be made next week.

"This is the first time the euro area inflation rate has accelerated since September last year, and we think that it should rise further in September," wrote Francois Cabau, economist at Barclays Capital, in a research note. He added that Barclays believes the main influence on inflation was the cost of energy.

Bloomberg reported that unemployment was 11.3% in July. That was the same, according to the EU statistics office, as a revised total for June, and the highest since 1995, when such data records began.

“The whole eurozone is undergoing negative growth developments,” according to Don Smith, a London-based economist at ICAP, who said in the report, “The sense is that increasingly the eurozone crisis is bearing down on countries in northern Europe and Germany in particular and this is really forcing officials’ hands toward coming up with a firm solution.”

Some economists believe that the ECB will cut rates at its Thursday meeting, while others instead felt that October would be a more likely time for the action.

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