European inflation (ECCPEMUY) slowed in December, giving the European Central Bank room to lower borrowing costs further to shore up the economy.
The inflation rate (ECCPEMUY) in the 17-nation euro area fell to 2.8 percent from 3 percent in November, the European Union’s statistics office in Luxembourg said in an initial estimate today. That’s in line with the median of 27 economists’ estimates in a Bloomberg News survey.
Europe’s economy is edging toward a recession, adding pressure on companies to lower prices to bolster consumer demand. ECB President Mario Draghi on Dec. 8 called risks to the price outlook “broadly balanced,” after cutting the benchmark interest rate for a second time in as many months.
“In terms of general economic environment, it’s hard to see any strong price pressures coming from the domestic side,” said Nick Matthews, an economist at Royal Bank of Scotland Plc in London. “We may see euro-region inflation a lot closer to 2 percent by the end of the first quarter.”
The euro pared losses after the data were released, trading at $1.3045 at 11:04 a.m., down less than 0.1 percent on the day.
Euro-region inflation may average 2 percent this year and 1.5 percent in 2013, the ECB said on Dec. 8. In 2011, consumer prices probably increased 2.7 percent on average, it estimated.
Consumer Confidence
While crude oil prices have increased 11 percent over the past year, companies may find it difficult to pass on higher costs as governments toughen austerity measures and the economy cools. Euro-region unemployment rose to 10.3 percent in October, the highest in more than a decade, and consumer confidence fell to the lowest in more than two years last month.
Euro-region economic confidence (EUESEMU) probably dropped to the lowest in more than two years in December, according to a Bloomberg survey. The European Commission will release the report measuring confidence of households, builders and manufacturers on Jan. 6.
L’Oreal SA (OR), the world’s largest cosmetics maker, said on Nov. 7 that Portugal, Italy, Greece and Spain held back growth in the third quarter, leaving the Paris-based company “cautious” for the rest of 2011. The situation remains “difficult in southern Europe,” Chief Executive Officer Jean- Paul Agon said in a statement.
‘A Decent Chance’
While the ECB was forced to reverse last year’s two rate increases, expand provisions of unlimited cash to banks and widen the pool of collateral to secure the funds, it has rejected stepping up purchases of government bonds. Draghi has said it’s up to governments to restore confidence.
ECB council members will hold their next rate meeting on Jan. 12 in Frankfurt. They had voted to cut interest rates at the previous two meetings by 25 basis points, bringing the benchmark to 1 percent, matching a record low.
“There is a decent chance of another cut, to 0.75 percent, even if it does not come” next week, said Steven Barrow, head of Group of 10 currency strategy at Standard Bank Plc in London, in an e-mailed note ahead of today’s report. “We suspect there will be sufficient hints from ECB members that 1 percent should not be considered the floor.”
The statistics office will release a breakdown of December consumer prices on Jan. 17. Euro-area core inflation (CPEXEMUY), which excludes volatile costs such as energy, held at 1.6 percent in November from the previous month.
To contact the reporter on this story: Simone Meier in Zurich at smeier@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
