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Euro Zone Inflation Up, Points to Interest Rate Hike

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Inflation in the 17-country euro zone increased in April, according to Friday figures. The rate was 2.8%, compared with 2.7% in March; experts had expected it to remain flat. The increase, announced ahead of the next meeting of the European Central Bank (ECB) set for May 5 to discuss interest rates, makes it more likely that rates will be increased a bit earlier than previously expected.

In a Reuters report, Piet Lammens, economist at KBC, said of the news, "I can imagine that some market participants will expect the rate increase by the European Central Bank at an earlier date. We expected June, the market is still expecting July. I guess the consensus will now move to June."

The ECB raised rates from 1.0% to 1.25% in April in response to the rising costs of energy and food and their effect on consumer prices.

Concern over the economy has colored the responses to the monthly European Commission (EC) survey on economic sentiment. For the second month in a row it was down, falling from 107.3 in March to 106.2 in April; that is below market expectations of a considerably more modest decline to 107.0.

Household demand was also lower, with retail sales falling. In Germany, where they were expected to increase, they declined 2.1% month over month, adjusted for rises in consumer prices; YOY they fell 3.5%. Peripheral euro zone countries saw greater declines, with Spain losing 8.6% YOY in March and Greece 10.6% in February.

Martin van Vliet, economist at ING, was quoted in the report as saying, "Survey data from the European Commission clearly indicates that the combination of high oil prices, a strong euro, and fiscal and monetary tightening has started to dent the economic mood in the euro zone." The drop hit all economic sectors except for construction, with consumer optimism suffering the most: it fell from -10.6 in March to -11.6.

Unemployment data for the euro zone held steady at 9.9% in March.