Posted at: 11/29/2013 11:35 AM
By PAN PYLAS

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Eurozone inflation rise eases pressure on ECB

(AP) LONDON - Welcome news on inflation and unemployment on Friday will ease pressure on the European Central Bank to act again next week to shore up the 17-country eurozone economy. But they do little to ease longer-term worries over the recovery.

Eurostat, the EU’s statistics office, said unemployment was down for the first time since early 2011 and that inflation edged higher in November, dampening fears that the eurozone is about to face a debilitating period of falling prices, also known as deflation.

The inflation rate rose to 0.9 percent in the year to November from October’s 0.7 percent, slightly ahead of market expectations for a 0.8 percent increase.

Still, inflation remains well below the ECB’s target of just under 2 percent. It was a sharp fall in October to a near four-year low that spurred the central bank this month to cut its main interest rate to a record low of 0.25 percent.

The fall in inflation had raised fears of deflation, a protracted fall in prices that can cause a slide in consumer spending as individuals put off purchases in the hope of getting better bargains. Deflation has blighted Japan’s economy for the best part of two decades.

Friday’s figures will likely convince the ECB to hold rates unchanged at its monthly policy next week, especially as a separate survey pointed to a turning point in the labor market.

Frederik Ducrozet, an economist at Credit Agricole, said the rise in inflation "should buy the ECB more time to decide whether or not to provide more accommodation."

Separately, Eurostat said unemployment across the eurozone eased from September’s record high of 12.2 percent to 12.1 percent in October. That was the first decline in the rate since February 2011 but still compares unfavorably with the equivalent U.S. rate of 7.3 percent.

Though the overall rate masks huge disparities across the eurozone, particularly among the young, Eurostat said that the number of people unemployed in the region fell by 61,000 to 19.30 million during the month. The fall, largely a result of declines in the largest economies of Germany and France, was the first since April 2011 and came despite a 0.1 percentage point increase in the overall youth unemployment rate to 24.4 percent.

The figures showed labor market conditions in weaker countries like Greece and Spain remained tough. In Greece, unemployment at last count in August was 27.3 percent, while in Spain it stood at 26.7 percent.

Though Friday’s figures may mean the ECB doesn’t loosen its policies further next week, many economists think it will be forced to give the region’s economy a further shot of support early next year.

Despite the rise in inflation in November, the specter of deflation hasn’t gone away, partly because wage increases are muted due to high unemployment and the high value of the euro has made imports cheaper. Some countries, notably Greece, are already facing falling prices, a development that may make its debt servicing even more difficult.

Marie Diron, senior economic adviser at EY, formerly Ernst & Young, thinks policymakers at the ECB need to be mindful of deflation.

"The ECB needs to recognise the risk of deflation more clearly and act pre-emptively," said Diron. She said the ECB should provide clearer indications that its interest rates will remain low for a long period of time.

Following its longest-ever recession, the eurozone has now grown modestly for two quarters. However, the tepid 0.1 percent quarterly growth recorded in the third quarter dashed hopes that the recovery was picking up steam. Deflation, if it takes hold, could make matters worse.

Japan’s deflationary spiral appears to be ending only after massive stimulus efforts from the central bank. Figures for October show the annual inflation rate there rose to 0.3 percent, its highest since 1998. In the U.S., inflation is also low _ just 1 percent _ but the Federal Reserve is pumping $85 billion a month into the economy to boost the economy.

The ECB has no comparable program. Economists said it would have responded to another drop in inflation by cutting borrowing costs further or making banks pay more to keep deposits with it.

(Copyright 2013 by The Associated Press. All Rights Reserved.)