Europe Economy

Euro Zone Inflation Steady, but Still High


Euro zone inflation remained at a record high in February, the European Union's statistics office estimated on Monday, ahead of the European Central Bank's rate meeting and new growth and inflation forecasts on Thursday.

Consumer prices in the 15 countries using the euro rose 3.2 percent year-on-year last month, the same as in January and in line with market consensus, Eurostat said. Some economists had
expected 3.3 percent.

The reading is the highest since measurements for the euro zone began in January 1997.

The estimate does not contain a month-on-month figure or a detailed breakdown, but economists have said inflation is being driven mainly by food and energy prices.

The ECB wants to keep inflation just below 2 percent, but has refrained from raising interest rates to curb price growth because it believes the inflation surge is temporary, especially as economic growth is slowing.

But fast price rises are also making it difficult for the bank to cut interest rates even though the European Commission expects economic expansion to slow from 2.7 percent in 2007 to 1.8 percent this year, below potential growth.

The bank's fight against inflation is likely to be made easier by a strong euro, which hit record highs against the U.S. dollar at above $1.52 on Friday, and against the British pound -- the two main trading currencies for the euro zone.

The strong euro also helps offset some of the negative effects on consumer spending power of high oil prices, which on Monday were $101.59 per barrel -- just below the record high of $103.05 set on Friday.

But the euro's exchange rate is a drag on euro zone exports, alarming European companies which on Friday called on euro zone finance ministers and the ECB to tackle the issue when they meet for a monthly discussion of the economy later on Monday.

Manufacturing Activity Slips, But Prices Rise

Euro zone manufacturing activity eased as expected in February, in line with a flash estimate,
but prices charged at the factory gate rose at their fastest pace in nearly a year, a survey showed on Monday.

The RBS/NTC Eurozone Manufacturing PMI for February slipped to 52.3, its lowest since October, in line with the median forecast of 40 economists but still well above the 50 mark that
divides growth from contraction.

The data will make difficult reading for the European Central Bank which is concerned about rising inflation in the face of a slowing economy in the 15-member currency bloc, although financial markets did not move on the figures.

"The final PMI data for February signalled the resumption of slower activity in the euro zone manufacturing sector due to the combined headwinds of slower economic growth in export markets, the strong euro and high commodity prices," said Jacques Cailloux, chief euro area economist at survey sponsor RBS.

The market showed little reaction to the data after the euro  hit record highs against the dollar on Friday above $1.52 on fears of an impending recession in the United States.

Figures due at 3 pm London time are expected to show U.S. factory activity contracted in February, with only strong export growth keeping alive hopes output expanded.

The Institute for Supply Management's index is expected to fall to 48.0 after an unexpected rise to 50.7 in January.

Cailloux said Spain had seen a dismal performance, with the main index slipping to 46.7 from 49.8 in January -- its third month of contraction -- while Italy showed further signs of weakness, dropping to 50.6 from 50.8.

"Spain is the country to look at -- it fell three points in just one month and it really looks like things are turning sour. Without some consolidation going forward there would be a serious risk of recession this year in Spain," said Gilles Moec at Bank of America.

However, it was not all bad news. Germany, the region's biggest economy, saw its main index slip only marginally to 54.3 from 54.4 while France, the second biggest economy, saw its manufacturing PMI edge lower to 53.8 from 53.9.

The euro zone factory input prices index rose to 66.1, a high not seen since July, and prices are set to rise further as energy and fuel costs continue to soar -- London Brent crude hit a record above $101 last week.

"High oil, energy and food prices in particular continued to be widely reported," survey organiser NTC said.

The new export orders index slumped to 51.0, a level not seen since May 2005, as global markets remained in turmoil over the credit crunch and as a strong euro made exports more