European Inflation Slows on Weakening Recovery

European inflation slowed in February after rising unemployment and a weakening recovery prompted households to scale back spending.

Consumer prices in the 16-nation euro region rose an estimated 0.9 percent from a year earlier after increasing 1 percent in January, the European Union statistics office in Luxembourg said today. Producer prices fell 1 percent in January from a year earlier, the smallest decline in a year, the statistics office said in a separate report.

European companies may find it difficult to pass on higher costs after unemployment held at an 11-year high in January and the economic recovery slowed to a near-halt in the fourth quarter. The European Commission said last week that the euro region may fail to gather strength for most of 2010 and the European Central Bank forecasts "subdued" price pressures.

"Wage costs are probably coming down and there's a lot of slack in the economy; companies don't have much pricing power," said Nick Kounis, chief European economist at Fortis Bank Nederland NV in Amsterdam. "The outlook is for low inflation, well below the ECB's price-stability goal."

The euro pared its declines against the dollar after the data and traded at $1.3517 at 10:49 a.m. in London, down 0.3 percent on the day after trading as low as $1.3436 earlier. The yield on the German 10-year benchmark bond was unchanged at 3.11 percent.

Manufacturing Industry

Today's inflation report was in line with economists' forecast in a Bloomberg News survey. Producer prices rose 0.7 percent from December, when they increased 0.1 percent. Costs of energy in the manufacturing industry declined 1.7 percent in the year.

Inflation will probably average 0.8 percent in the current quarter before accelerating to 1.3 percent in the three months through June, the commission forecast on Feb. 25. Gross domestic product may rise just 0.2 percent in both quarters, it said.

Europe's economy may struggle to gain momentum after expanding just 0.1 percent in the fourth quarter as a doubling in oil prices over the past year leaves companies and consumers with less money to spend. Euro-area unemployment remained at 9.9 percent in January, the highest since November 1998. European economic confidence unexpectedly declined in February.

Volkswagen AG, Europe's largest carmaker, said on Feb. 26 that profit dropped 80 percent last year as the global recession eroded deliveries of the Audi luxury brand. Club Mediterranee SA, Europe's largest resort company, said last month that first- quarter sales declined as travelers cut their holiday budgets.

Record Low

The ECB on March 4 will probably keep its benchmark interest rate at a record low of 1 percent, according to a Bloomberg survey. The Frankfurt-based central bank also will publish updated inflation and growth forecasts.

"I don't expect the ECB to start raising borrowing costs before early 2011," said Juergen Michels, chief euro-area economist at Citigroup Inc. in London. " We see very few inflation threats ahead."

The statistics office will release a breakdown of February inflation on March 16.