Euro-Area Inflation Slowed in May, Easing Pressure on ECB

May 31, 2011, 7:48 AM EDT By Simone Meier

(Updates with comment from economist starting in fourth paragraph.)

May 31 (Bloomberg) -- European inflation unexpectedly slowed in May, giving the European Central Bank room to keep borrowing costs on hold next month.

Inflation in the 17-nation euro region slowed to 2.7 percent from 2.8 percent in April, the European Union’s statistics office in Luxembourg said today in an initial estimate. Economists had forecast no change in the inflation rate, the median of 33 estimates in a Bloomberg News survey showed. Unemployment held at 9.9 percent in April from the previous month, a separate report showed.

ECB President Jean-Claude Trichet has signaled that the central bank may keep interest rates on hold in June after last month increasing the benchmark rate 25 basis points to 1.25 percent to fight price pressures. With the recovery losing momentum and governments cutting spending to plug budget gaps, the Organization for Economic Cooperation and Development said on May 25 that further rate increases “are not required immediately.”

“The decline was largely down to lower energy prices and the unwinding of the ‘late Easter effect,’ which led to a surge in inflation in the leisure and entertainment sector last month,” Martin van Vliet, an economist at ING Groep NV in Amsterdam, said in an e-mailed note to investors.

Energy, Food Prices

“Looking ahead, euro-zone headline inflation is set to stay well above 2% in the remainder of this year as energy and food prices continue to have an upward impact on consumer prices,” van Vliet said.

The euro extended gains after the data were released, trading at $1.4415 at 11:34 a.m. in Brussels, up 0.9 percent.

The OECD forecasts euro-region growth to accelerate to 2 percent this year from 1.7 percent in 2010, with unemployment averaging 9.7 percent and 9.3 percent this year and next. Harmonized consumer prices may rise 2.6 percent in 2011 and 1.6 percent in 2012, the Paris-based group said.

Crude oil prices have surged 38 percent in the past year, trading at $102.03 a barrel today. That’s putting pressure on companies to protect earnings and pass on higher costs. Euro- region producer-price inflation unexpectedly accelerated in March and a gauge measuring households’ confidence in their ability to purchase big-ticket items in the coming year dropped in May from the previous month.

‘Second-Round Effects’

“We have to avoid commodity-price increases becoming entrenched in longer-term inflation expectations, which could have second-round effects on wages and prices,” Trichet said on May 26. “We are carefully monitoring the situation and we stand ready to do whatever is necessary.”

With rising prices sapping consumers’ spending power and governments from Spain to Ireland toughening austerity measures, the euro-region economy may struggle to gather strength. European services and manufacturing growth weakened in May and German investor confidence dropped more than economists forecast. European economic confidence also declined.

About 15.5 million people were unemployed in April, down 115,000 from the previous month, today’s report showed. At 20.7 percent, Spain had the highest jobless rate within the euro region. The Netherlands and Austria reported the lowest rate at 4.2 percent.

Michael O’Leary, chief executive officer of Ryanair Holdings Plc, Europe’s largest discount airline, told Francine Lacqua on Bloomberg Television’s “Countdown” on May 23 that while he’s “quite concerned” about economies, he remains “cautiously optimistic” for the full year.

‘Under Control’

“We have the costs very well under control,” O’Leary said. “We do better in a downturn because everybody gets more price-sensitive. We see strong growth in the first half of the year, being the summer months. As oil prices rise, we are going to cut capacity during the winter months.”

The statistics office will release a breakdown of May consumer prices next month. Euro-region core inflation accelerated to 1.6 percent in April from 1.3 percent in the previous month. That’s the fastest pace since April 2009.

The ECB is scheduled to hold its next monetary assessment on June 9 in Frankfurt.

--With assistance from Jurjen van de Pol in Amsterdam, Kristian Siedenburg in Budapest and Francine Lacqua in London. Editors: Patrick Henry, Jennifer M. Freedman

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

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