Euro zone July inflation hits record 4.1%

Written by Reuters | Brussels, July 31: | Updated: Jul 31 2008, 20:41pm hrs
Euro zone inflation jumped to another record high of 4.1 per cent year-on-year in July as forecast, data showed on Thursday, but a bleak economic outlook may discourage interest rate increases this year.

Price growth in the 15-nation euro area accelerated from July's 4.0 per cent, moving further from the European Central Bank's target of just below 2 per cent, European Union statistics office Eurostat said in its "flash" estimate for July.

It was the highest inflation figure for the currency area since measurements started in 1997.

Analysts polled by Reuters had expected June inflation to rise to 4.1 per cent, boosted by soaring energy and food prices.

Separately, unemployment in the euro zone unexpectedly edged up, in another sign of a slowing economy.

Eurostat revised up the jobless rate for May to 7.3 per cent from a previous reading of 7.2 per cent, and said the figure held stable in June. Economists had expected June unemployment to come at 7.2 per cent.

The economy is burdened by a strong euro, soaring prices of food and energy, tight credit conditions and an increasingly visible slowdown in other major industrialised countries.

Many economists believe the ECB will refrain from increasing interest rates again this year as slowing growth is seen taming price growth pressures, although the bank's policymakers stress the importance of anchoring inflation expectations.

"Our first priority is to curb inflation," ECB Governing Council Member Nout Wellink said in an interview published on Thursday before the inflation data was released.

Guy Quaden, also on the bank's Council, said in the same interview: "... it is important that the inflation expectations in the medium term remain anchored to our target."

The ECB increased its main interest rate by 0.25 per centage point to 4.25 per cent in early July.

The ECB wants to limit the impact of growing energy and food costs on prices in the wider economy, trying to prevent what it calls a wage-price spiral.

Slovenian Finance Minister Andrej Bajuk said he expected euro zone inflation to ease towards the end of 2008. "A lot depends on external shocks, on what is happening in other continents," he said late on Wednesday.

Eurostat's inflation estimate contained no monthly data or detailed breakdown but separate country data has shown inflation in Germany, the euro zone's biggest economy, holding steady at 3.3 per cent, the highest level since December, 1993.

In Spain, a one-time boomer hit by a housing bust, inflation in July climbed to 5.3 per cent from 5.1 per cent in June, the highest since records began in January 1997, while Belgian July inflation hit a 24-year high of 5.9 per cent.