Eurozone inflation eases to 2.7 percent

[May 31, 2011]  FRANKFURT, Germany (AP) -- Inflation eased to an annual 2.7 percent in May for the 17 countries that use the euro, according to official figures released Tuesday. The drop surprised markets but may not be enough to stop the European Central Bank from using its next meeting to signal a coming interest rate hike.

The figure fell from 2.8 percent the month before, the European Union statistics agency Eurostat said. Market analysts had predicted it would remain steady or even increase to 2.9 percent.

However, the figure remains above the European Central Bank's goal of just under 2 percent and isn't likely to deter or delay another rate hike, said analyst Jonathan Loynes at Capital Economics in London. "Next week's policy meeting will almost certainly signal (via the code word 'vigilant') another rate hike in July."

Loynes said the figure was disappointing when compared with a steeper drop last week in German inflation from 2.7 percent to 2.4 percent.

Eurostat's report on Tuesday was only a first estimate of inflation, meaning it could be revised later, and did not contain details on why price increases slowed. Economists say a dip in high oil prices was likely the main factor.

The ECB typically gives markets a fairly clear indication of a coming rate hike a month ahead. The term, "strong vigilance" used at the bank's monthly news conference is often the key phrase in such cases. The bank's next meeting is June 9.

The ECB raised its key rate by a quarter-point to 1.25 percent in April, and is weighing how fast to continue with increases to prevent higher inflation from being built into the economy through wage hikes.

The bank relies more on forecasts than on monthly figures, which look to the past. The data will support calls for the bank to take it slow, but analysts are still expecting the bank to move ahead with another increase in July.

Bank President Jean-Claude Trichet has said the ECB, the chief monetary authority for the 330 million people who live in the eurozone, is determined to keep inflation from getting out of hand.

The bank has stayed with an anti-inflation message even though higher rates could make life harder for the small part of the eurozone -- Greece, Portugal and Ireland -- that is strugglig with debt crises and recessions. The bank's governing council must find one interest rate that suits the eurozone as a whole, and most of the currency area is growing. Germany, the euro's biggest economy, is enjoying strong growth, boosted by exports and investment in new machines and equipment.

Meanwhile, the eurozone's unemployment rate was unchanged at 9.9 percent in April. The lowest rates were 4.2 percent in Austria and the Netherlands, while Spain continued to struggle with 20.7 percent, and a youth unemployment rate for under 25s of 44 percent.

The unemployment rate for the broader, 27-member EU was 9.4 percent in April, down from 9.5 percent in March.

[Associated Press; By DAVID McHUGH]

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