Euro-Region Inflation Rate Declines More Than Forecast: Economy

European inflation slowed more than economists forecast this month, cooling to the least in more than a year as the economic slump showed signs of deepening.

The inflation rate in the 17-nation euro area fell to 2.4 percent from 2.6 percent in April, the European Union’s statistics office in Luxembourg said today. That’s the slowest since February 2011. Economists forecast a 2.5 percent rate, based on the median of 32 estimates in a Bloomberg News survey. A separate report showed German unemployment fell last month.
Crude-oil prices have dropped about 16 percent in the past two months, easing inflation pressures and giving the European Central Bank more room to focus on ways to bolster the economy after Greece’s inconclusive elections raised investor concerns about a euro breakup. The single currency slumped to a near two- year low versus the dollar this week and European economic confidence dropped more than economists forecast in May.

“The persistent economic downturn in the euro zone is likely to keep underlying inflation low for a protracted period,” said Martin van Vliet, an economist at ING Bank in Amsterdam. “Although the ECB will likely keep interest rates on hold next week,” President Mario Draghi “could open the door to further monetary easing later this year.”

The euro rose against the dollar today, gaining 0.4 percent to $1.2410 as of 11:25 a.m. in London. The Stoxx Europe 600 Index advanced 0.4 percent.
Confidence Slump

Adding to signs of a deepening slump, German business confidence fell more than economists forecast in May, recording the steepest decline since August. A gauge of euro-region manufacturing output dropped to the lowest in 35 months in May, while a measure of service industries fell to a seven-month low.

Still, data today showed the German unemployment rate fell to 6.7 percent in April from 6.8 percent. The number of jobless was unchanged in seasonally adjusted terms at 2.87 million. Economists in a Bloomberg survey had forecast a drop.

The inflation and jobless data “were rare pieces of good news for the beleaguered euro zone,” said Ben May, an economist at Capital Economics in London. “But the recent sharp falls in business sentiment and activity and the deepening debt crisis mean that the economic outlook remains bleak.”
Retail Sales

German retail sales rose a faster-than-forecast 0.6 percent in April from the previous month, when they advanced 1.6 percent, separate data showed. Volkswagen AG (VOW), Europe’s largest carmaker, agreed to a 4.3 percent pay increase for its carmaking and financial-services workers in western Germany in a 13-month contract approved today.

In France, consumer spending also rose more than projected last month, increasing 0.6 percent. Producer-price inflation slowed to 2.7 percent from 3.7 percent, adding to signs of easing cost pressures, according to a report published by the Insee statistics office.

Elsewhere today, domestic demand spurred an unexpected gain in South Korean industrial production in April and stronger- than-forecast growth in the Philippine economy in the first quarter, two reports showed.

That contrasts with data that Japan’s industrial output rose less than estimated in April from the previous month. In India, gross domestic product rose 5.3 percent in the three months through March from a year earlier, less than all 31 estimates in a Bloomberg survey, and Australian home-building approvals unexpectedly fell in April.

In the U.S., revised first-quarter GDP figures later today may show a slower pace of expansion. The world’s largest economy probably grew at a 1.9 percent annualized rate from January through March, compared with an initial estimate of 2.2 percent, according to a Bloomberg survey.
U.S. GDP

In Europe, the ECB will publish new economic projections when its Governing Council meets on June 6. It aims to keep inflation just below 2 percent and currently forecasts price growth of 2.4 percent this year and 1.6 percent in 2013.

Euro-area core inflation, which excludes volatile costs such as energy, held at 1.6 percent in April. The statistics office will release a breakdown of May inflation next month, and Van Vliet at ING said the decline in the headline rate this month was probably due to energy and food prices.

Retreating energy costs are easing pressure on the central bank as the crisis worsens. Spanish Prime Minister Mariano Rajoy last week called on the ECB to buy his government’s bonds, after yields approached the level that pushed Ireland, Greece and Portugal into seeking external aid.
ECB Mandate

“It’s not our mandate” and “not our duty” to “fill the vacuum left by the lack of action by national governments,” Draghi said in Brussels today. “The ECB will continue lending to solvent banks and will keep the liquidity lines active and alive with solvent banks.”

Responding to criticism that the ECB’s liquidity policies are stoking inflation, Executive Board member Joerg Asmussen said on May 24 that there is “no reason to question our commitment to price stability.”

“If inflationary risks were to emerge, we would take the necessary action to prevent these risks from materializing and withdraw any excess liquidity,” Asmussen said. Still, euro- region inflation will probably remain “close to, or slightly below, 2 percent for the foreseeable future.”