Eurozone inflation falls, jobless jumps

BRUSSELS/BERLIN - Reuters

As inflation in the eurozone fell last month, unemployment rate hit record. AFP photo

Inflation in the eurozone has fallen to a three-year low and unemployment has hit a new record, cementing expectations of an interest rate cut by the European Central Bank later this week.

With the bloc’s economy mired in recession, inflation tumbled to 1.2 percent in April, the lowest level since February 2010 and the biggest monthly drop in more than four years, the European Union’s statistics office Eurostat said today.

That put the annual rate of increase in the cost of living well below the ECB’s target of close to, but below 2 percent, raising pressure on the central bank to act to aid growth. Eurozone unemployment meanwhile reached a record 12.1 percent of the working population in March.

EU leaders are already trying to shift away from the budget cuts that have dominated the response to the debt crisis since 2009, and the data will raise the spectre of deflation as companies slash prices to entice shoppers.

But the European Commission, which polices countries’ debts and deficits, defended its insistence on sustainable public accounts that many economists blame for deepening the two-year recession, saying it had “no austerity dogma”.

“That is a caricature, our approach is a balanced one,” said Commission spokeswoman Pia Ahrenkilde Hansen.

Cutting interest rates to a new record low of 0.5 percent would show investors the ECB is concerned about the poor state of the bloc’s economy, but the Frankfurt-based bank faces a difficult balancing act accommodating a more resilient Germany.

German consumers were more upbeat going into May than at any point in the past 5-1/2 years and data showed the unemployment rate in April nearing post-reunification lows, a sign that consumers may be positioned to help drive a recovery.

“It’s a close call, but we expect a rate cut this week,” said Sarah Hewin, a senior economist at Standard Chartered Bank.

“With inflation weaker than expected, unemployment rising yet again and signs of a longer recession, it would be a confidence boost.”

The ECB expects the eurozone’s economy to start recovering in the second half of the year, but recent data has cast doubts on that forecast, especially with the German economy struggling to rebound strongly from its fourth-quarter contraction.