Eurozone inflation stabilises in June

Eurozone inflation stuck to the European Central Bank's target level in June, data showed on Friday, but price rise expectations rose and business morale remained strong, making higher interest rates seem more likely. Annual inflation in the 13 countries using the euro was unchanged at 1.9 percent in June, as expected, European Union statistics office Eurostat said on Friday.
The ECB aims to keep inflation below but close to 2 percent. Price growth has satisfied that criterion since September 2006 but ECB officials say the bank must stay vigilant about medium-term inflation developments.
"Although eurozone ... inflation remained encouragingly muted at 1.9 percent, the ECB is unlikely to relax its guard against the significant upside risks it sees to medium-term price stability," said Howard Archer, chief UK and European economist at Global Insight. The "flash" estimate gives neither breakdowns by country or item, nor a month-on-month figure.
The European Commission's monthly survey of consumer and business sentiment both showed prices were expected to increase. The ECB watches the survey closely and takes it into account.
Analysts expect the ECB to leave interest rates on hold next week after eight hikes in the last 18 months. But most see it raising rates again to 4.25 percent after the summer break. Some say the ECB will probably have to hike benchmark rates even further, given the outlook for continued strong growth in the eurozone. Strong growth of money supply in May, reported on Thursday, reinforced that view.
The monthly European Commission survey showed economic sentiment in the eurozone edged down to 111.7 in June, as expected, from May's revised 112.1. But the reading was still higher than in many previous months.
"The Commission's headline economic confidence index remained solid, confirming that sentiment remains buoyant," said Jodie Tiller, analyst at CIBC World Markets. European Union Monetary Affairs Commissioner Joaquin Almunia said on Thursday that economic growth in the eurozone could exceed a Commission forecast of 2.6 percent for 2007.
Analysts' optimism about the eurozone's economy was also boosted by a rise of French consumer confidence to its highest level in at least three years as reported by the INSEE national statistics office. That helped mitigate analysts' disappointment at first quarter French growth, which was confirmed at 0.5 percent. The economy failed to gather much momentum from the fourth quarter of 2006 when it grew 0.4 percent.
In the eurozone, consumer sentiment, long the weakest point in monthly Commission surveys, declined to minus 2 in June from minus 1 in May. Economists had expected it to be unchanged. In Germany, retail sales posted a small decline in May, official data showed, but economists said spending nevertheless looked on track for a solid second quarter.
Sales fell 0.1 percent in real terms from the previous month on a seasonally-adjusted basis after a gain of 0.5 percent in April, according to a Bundesbank measure. On Thursday, data showed that Germany's jobless total fell for a 15th straight month in June, taking the unemployment rate down to the lowest level in more than 12 years.
The Commission's business climate indicator, which points to the phase of the business cycle, rose to 1.54 in June from a revised 1.52 in May, compared with 1.50 expected by economists. The EU executive said the indicator's still high level pointed to robust activity in industry in the second quarter.