Euro Zone Inflation at 6.5-Year High, Sentiment Dips

Euro zone inflation jumped more than expected in November to its highest in six and a half years and inflation expectations rose while economic sentiment worsened, highlighting the European Central Bank's rate dilemma.

The European Union's statistics office estimated that consumer prices in the 13 countries using the euro rose 3.0 percent year-on-year, up from 2.6 percent in October. That was the highest since May 2001, when inflation hit a record high of 3.1 percent. Economists had expected 2.9 percent for November.

Eurostat will not give monthly data and a detailed breakdown of the inflation estimate until Dec. 14, but economists said the jump was due to an acceleration of food and energy price growth, with high inflation in Germany and Spain.

The ECB, which meets on interest rates next Thursday, wants to keep annual inflation just below 2 percent over the medium term and has said it expected a protracted period of price growth above its target.

A monthly European Commission survey also showed that inflation expectations among businesses and consumers rose in November and were well above long-term averages.

Despite tough talk from the ECB on rising inflation risks, economists expect the bank to keep rates unchanged at 4.0 percent well into 2008 and some say the next move would be a rate cut as the euro zone economy slows next year.

More evidence of the coming slowdown came in the Commission's sentiment survey, which showed confidence in the euro zone falling more than expected to 104.8 points from an upwardly revised 106.0 in October.

Economists had expected a decline to 105.0. The weaker sentiment was caused by steep drops in confidence in the service sector, which produces more than two thirds of the euro zone gross domestic product, consumers and the construction sector.

This offset rebounds in industry and the retail sector.

Eurostat confirmed on Friday that the euro zone economy rebounded sharply in the third quarter, expanding by 0.7 percent quarter-on-quarter and 2.7 percent year-on-year. The annual figure was higher than previously estimated.

It was driven mainly by household consumption, investment and inventory growth, which offset a negative contribution from net foreign trade.