Euro Zone Inflation Hits New High, Sentiment Slumps

Euro zone inflation hit an all-time high in January and economic sentiment plunged to two-year lows, data showed on Thursday, underlining the European Central Bank's monetary policy dilemma.

The European Union's statistics office Eurostat estimated that inflation in the 15 countries using the euro rose to 3.2 percent year-on-year in January, the highest reading since measurements for the single currency area began in January 1997.

Economists had expected inflation to remain unchanged at 3.1 percent, like in December and November.

No monthly data or detailed breakdown was available with the Eurostat estimate.

Rising inflation makes life more difficult for the ECB which wants to keep inflation just below 2 percent over the medium-term. But it has so far refrained from raising interest rates because of signs that the economy is slowing.

Most economists believe that later this year the bank will have to cut rates, following the example of the U.S. Federal Reserve, to support euro zone expansion.

A monthly European Commission survey showed economic sentiment tumbled to 101.7 points -- its lowest reading since the start of 2006 from a downwardly revised 103.4 in December and 104.1 in November, also revised down.

The January reading was a long way below market expectations of 104.0.

All components of the sentiment indicator this month fell with confidence among consumers and in the retail trade sector taking the biggest hit.

Confidence among consumers sagged to -12 from -9 points even though data showed that December unemployment in the euro zone was unchanged at record lows of 7.2 percent of the workforce.

Eurostat said 11 million people were without jobs in the euro area, against 11.8 million 12 months earlier.

Also the Commission's business climate indicator, which points to the phase of the business cycle, dipped more than expected in January to its lowest level since March 2006.