Eurozone inflation picks up but remains below target

By PAN PYLAS Markets Associated Press

Inflation across the 19-country eurozone struck a four-month high in August largely because of higher energy costs, official figures showed Thursday in a development that's unlikely to alter expectations that the European Central Bank will play it relatively safe at next week's policy meeting.

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Eurostat reported that annual consumer price inflation picked up to 1.5 percent from July's 1.3 percent. Though the increase was anticipated in financial markets, inflation remains below the European Central Bank's goal of just below 2 percent.

As a result, most economists believe the ECB will opt against any big announcement next week on the speed at which it will rein in its monetary stimulus program.

"The ECB is unlikely to be in any hurry to exit from its ultra-expansionary policy," said Christoph Weil, an analyst at Commerzbank. "It will probably only slightly adjust its forward guidance."

This year's pick-up in growth has stoked talk in the markets that the bank will soon follow the U.S. Federal Reserve in bringing an end to the emergency measures it put in place during the past few crisis-ridden years.

Those measures have included slashing interest rates including the ECB's main one to zero in order to boost economic activity and stoke price pressures. The bank has also sought to keep market interest rates, which affect the costs of loans and mortgages, low by flooding the financial system with newly-created money. As part of that program, the ECB is pumping 60 billion euros ($71 billion) a month into the eurozone economy, a program that is intended to run until the end of the year, or beyond if necessary. The ECB has insisted that the policy will remain in place until policymakers have seen a "sustained adjustment in the path of inflation consistent with its inflation aim."

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One reason why ECB watchers believe the central bank will tread carefully at its Sept. 7 meeting is the euro's recent strength. The euro has risen around 10 percent this year against the dollar, rising earlier this week to above $1.20 for the first since January 2015. On Thursday, it faltered somewhat after the inflation data, trading down 0.1 percent at $1.1880.

As well as potentially weighing on exports, the high currency has the potential to keep a lid on inflation by making imports cheaper. That's not ideal for a central bank aiming to stoke price pressures in the economy.

Eurostat also reported Thursday that the core rate, which strips out potentially volatile items such as food and energy, was unchanged at 1.2 percent, a sign of stubborn underlying inflation pressures. That's also likely to weigh on policymakers in their deliberations next week.

Cathal Kennedy, European economist at RBC Capital Markets, thinks that the ECB will reduce the amount of its monthly purchases largely for technical reasons but refrain from announcing an end-date for its asset purchases while reinforcing its message that interest rates will remain low.

"We think that the still muted inflation backdrop mean that the ECB will still be 'patient' as it tapers purchases," Kennedy said.

Separately, Eurostat reported that unemployment across the eurozone was unchanged at 9.1 percent in July, its lowest level since February 2009. During the month, the number of unemployed people in the eurozone fell by 73,000, taking the total down to 14.86 million.

Of the 19 eurozone members, Germany has the lowest unemployment rate at 3.7 percent, while Greece has the highest at 21.7 percent, though that relates to May.