Euro-Zone Inflation Confirmed at 1.1%, Unemployment Rises to Two-Year High (Update)
Euro-Zone January HICP inflation was confirmed at 1.1% y/y, as expected. Prices fell 0.8% m/m on lower energy costs, as well as seasonal price reductions after the Christmas holiday period. Positive base effects from lower energy prices were one of the key reasons behind the deceleration in the headline rate, but core inflation, excluding energy and food also dropped - to 1.6% from 1.8% previously. The ECB has been stressing that its inflation "target" is symmetrical and that it wants to keep inflation below but close to 2%, which suggests that both headline and core inflation are now below target. Data will add to pressure on the ECB to cut rates next week, even though given the time lag with which monetary policy affects inflation monetary policy needs to be forward looking.
Meanwhile, German February inflation rose 0.6% m/m and 1.0% y/y, up from 0.9% y/y in January. HICP inflation was up 0.7% m/m and 1.0% y/y, also up from 0.9 %y/y in the previous month. Initial expectations had been for a rise in prices of around 0.3% m/m on seasonal factors, which should have brought annual rates down to 0.7% y/y. However, state data yesterday already indicated that February numbers would be higher than initially expected and pointed to acceleration in the annual rate to 1.0%, which therefore was no surprise. There was no breakdown with the preliminary numbers. At 1.0% y/y headline inflation still remains far below the ECB's 2% limit for price stability and Spanish HICP inflation decelerated to 0.7% y/y from 0.8% y/y, which on balance points to a stable Euro-Zone rate of 1.1% y/y in February, which will add to pressures on the ECB to cut rates again next week.
In addition, Euro-Zone January unemployment rose to 8.2% and the December number was revised up to 8.1% from 8.0% reported initially. The number is slightly higher than consensus expectations for a reading of 8.1%, but the rise is no surprise in the light of the sharp slowdown in production experienced across the Euro-Zone. The slump in demand has forced companies to cut back production and staff levels and the unemployment rate is set to rise further in coming months. Developments will weigh on consumption this year and also push up social security spending across the Euro-Zone.