Eurozone inflation eases in August to 1.6 percent

[August 31, 2010]  LONDON (AP) -- Inflation in the 16 countries that use the euro fell in August, official figures showed Tuesday, reinforcing market expectations that the European Central Bank will not be raising borrowing costs this year.

Eurostat, the EU's statistics office, said that consumer prices rose by 1.6 percent in the year to August, down from July's 20-month high rate of 1.7 percent. Inflation has been fairly elevated in the last few months as a result of higher energy prices year-on-year and sales tax rises in a number of countries, including Greece and Spain.

Nevertheless, inflation remains below the European Central Bank's target of keeping inflation "close to, but below 2 percent."

Most analysts think it is unlikely that inflation will spike up towards 2 percent in the coming months, especially as oil prices have generally been soft of late and last year's marked increases drop out of the comparisons.

In addition, high levels of unemployment are set to keep wage demands -- a key determinant of inflation -- low.

Separate figures Tuesday from Eurostat showed that the eurozone unemployment rate remained at 10 percent for the fifth month running in July, even though the number of people out of work fell 8,000 to 15.83 million -- a sign that the strong economic rebound is beginning to benefit the labor market.

With inflation thought to be under control and unemployment still elevated, the European Central Bank is expected to keep its main interest rate unchanged at 1 percent for a few months yet.

"There remains a compelling case for the ECB to keep interest rates down at 1 percent not only at its policy meeting on Thursday but for many more months to come, given that significant concerns remain about the longer-term outlook for eurozone expansion," said Howard Archer, chief European economist at IHS Global Insight.

"The ECB is very aware that tightening fiscal policy across the region, high unemployment and possible slowing global growth are serious threats to eurozone growth prospects over the coming months," Archer added.

Though the central bank will likely be encouraged that the eurozone economy is growing far faster than anticipated just a few months ago, when the government debt crisis was in full swing, rate-setters are likely to remain wary about the outlook for the second half of the year as the recoveries in the U.S. and Japan are losing steam.

Recent figures showed the eurozone economy grew by a quarterly rate of 1 percent in the second quarter, largely on the back of a 2.2 percent increase in Germany.

Despite the modest decline in the number of unemployed, there is a likelihood that unemployment in the eurozone will be on the rise again as a number of governments enact austerity measures and reduce the size of the public sector to get their public finances back into shape. Slower growth among global trade partners is also expected to weigh on Europe's exporters.

[Associated Press; By PAN PYLAS]

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