Simone Meier Zurich
EUROPEAN inflation held at the highest rate in three years in October, complicating the task of the European Central Bank (ECB) of shoring up the economy as it fights the sovereign debt crisis.
Consumer prices in the 17 nations using the euro rose 3 percent from a year earlier, the same rate of inflation as in September, the EU’s statistics office said yesterday. That is the biggest gain since October 2008.
Core inflation, excluding energy costs, held at 1.6 percent.
European companies may find it increasingly difficult to pass on higher costs as the euro zone economy edges toward a recession. While the ECB earlier this month unexpectedly cut its benchmark interest rate, it has resisted pressure to combat a worsening financial crisis by boosting its purchases of government bonds.
“There are major risks to the euro zone outlook,” IHS Global Insight chief euro region economist Howard Archer said. “We expect the ECB to respond to a likely euro zone contraction by following November’s interest rate cut from 1.5 percent to 1.25 percent with a further reduction to 1 percent within the next months.”
The European Commission said last week that euro zone inflation might average 2.6 percent this year, compared with the ECB’s aim of keeping annual price increases just below 2 percent. The EU executive reduced its 2012 inflation forecast to 1.7 percent from 1.8 percent.
Prices of crude oil have declined 4.6 percent over the past year, leaving consumers with more money to spend as the crisis prompted governments to toughen austerity measures.
Portugal’s economy contracted in the third quarter as it tightened its belt to meet terms of its international aid plan.
European indicators suggest that the region’s economy continued to weaken after expanding just 0.2 percent in the third quarter, adding pressure on companies to lower costs.
Euro zone manufacturing and services industries contracted last month and economic confidence slumped to the lowest in almost two years.
Unemployment unexpectedly increased in September, pushing the jobless rate in the euro area to 10.2 percent, the highest since June 2010.
With European leaders struggling to restore investor confidence, the ECB has been forced to resume purchases of covered bonds as well as offer banks unlimited cash for up to 13 months.
Earlier this month, ECB president Mario Draghi said the economy was heading toward a “mild recession by the end of the year”.
ABN Amro head of macro research Nick Kounis said: “We expect the economy to contract significantly in the fourth quarter, and the recession to last into next year. How deep and long the recession is depends on whether policymakers act decisively to contain the crisis.” – Bloomberg