Euro area inflation accelerates to 1.6% amid recession on energy

Euro-area inflation accelerated for a second month in June and manufacturing output contracted less than estimated, adding to signs that the 17-nation currency bloc is starting to emerge from a record-long recession.

The annual inflation rate rose to 1.6 percent from 1.4 percent in May, the European Union’s statistics office in Luxembourg said in a preliminary estimate today. That’s in line with the median of 40 economists’ estimates in a Bloomberg News survey. The rate has been below the European Central Bank’s 2 percent ceiling for five months.

A gauge of manufacturing in the euro area increased to a 16-month high of 48.8 in June, London-based Markit Economics said today. Still, the gauge has been below 50, indicating contraction, since July 2011. The jobless rate increased to a record 12.1 percent in May, a separate Eurostat report showed.

“It’s a good news day extending the cyclical improvement trend we’ve seen in the past three months,” Frederik Ducrozet, an economist at Credit Agricole SA, said by telephone from Paris. “We’re not out of the woods looking at the job numbers, and it’s not necessarily having an impact on the market because positioning flows dominate.”

Today’s inflation and manufacturing data followed an encouraging euro-zone economic confidence report for June that showed sentiment at its highest level for a year. The 17-nation economy’s 18-month recession probably ended in the second quarter, as the economy stagnated before returning to growth in the following three months, according to another Bloomberg survey of economists.

The ECB’s Governing Council will keep its benchmark rate unchanged at a record low of 0.5 percent when it meets on July 4, according to the median of 62 economists’ estimates in a separate Bloomberg survey. President Mario Draghi said last week that policy makers stand ready to act to support economic growth.

The ECB’s monetary policy “will stay accommodative for the foreseeable future,” Draghi said. “We have an open mind about all other possible instruments that we may consider proper to adopt.”

The inflation rate was driven higher by energy prices, which increased 1.6 percent in June after a 0.2 percent decline a month earlier, today’s report showed. Prices of food, alcohol and tobacco rose 3.2 percent, while the cost of services increased 1.4 percent.

“There’s no doubt that the low inflation right now is something the ECB likes,” said Marco Valli, chief euro-area economist at UniCredit Global Research in Milan. “Inflation has slowed down quite dramatically, and this is good for the purchasing power of households. Low inflation at this stage is good for growth and is good for competitiveness in the periphery.”

Markit’s euro-zone manufacturing gauge, based on a survey of purchasing managers, showed improvement in all countries except Germany.

“Manufacturing is showing welcome signs of stabilizing,” Chris Williamson, chief economist at Markit, said in the report. “Both output and new orders barely fell during June, and on this trajectory a return to growth for the sector is on the cards for the third quarter.”

Airbus SAS last month announced an order for 35 A350-1000 planes from United Airlines after the U.S. carrier converted 25 commitments for the -900 version of the aircraft to the larger model and agreed to buy 10 additional jets.

Avions de Transport Regional, the world’s largest maker of turboprop airliners, has already eclipsed its 2013 target for firm orders as purchases from lessors helped swell its backlog to a record $6.5 billion, the company said last month.

Yet unemployment in the euro area continues to edge higher, as governments across the bloc cut spending. The number of jobless people rose to 19.2 million in May, up 67,000 from the previous month. Youth unemployment was at 23.8 percent. The jobless rate in Germany, Europe’s largest economy, fell to 5.3 percent, while Spain had the highest May rate at 26.9 percent.

“Given the ongoing recession and sluggish economic outlook, it is likely that even higher peaks will be reached in the months ahead,” Bert Colijn, a labor-market economist with The Conference Board, said in an e-mailed statement. “With unemployment still rising in Spain, Greece, and Italy, one would expect a sharp increase in migration to better performing countries like Germany and the U.K.”


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