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European inflation stays below ECB's 2% ceiling for fifth month

Inflation in the euro area stayed below the European Central Bank's 2% limit for a fifth month in January as declining oil prices offset the effect of a German tax increase.

Confidence remained near a six-year high. The inflation rate was 1.9%, unchanged from December, the European Union's statistics office in Luxembourg said today. Economists forecast inflation would accelerate, boosted by a tax increase this month in Germany. European's confidence in the economy eased to 109.2 from 109.8 and unemployment declined to a record low of 7.5%, separate reports showed.
A 28% decline in oil prices since a record in July has helped tame price growth in the euro area. Still, the European Central Bank is concerned that faster-than-expected economic expansion and accelerating money-supply growth may reignite inflation in the 13 nations sharing the euro. „It's clear the ECB remains concerned about liquidity growth,” said Simon Barry, an economist at Bank of Ireland Plc in Dublin. „Economic growth is likely to be a bit firmer than they were expecting and that is a much more significant development for medium-term prospects for inflation.”
conomists surveyed by Bloomberg News forecast that inflation would accelerate to 2.1% after the German government on January 1 increased value-added tax, a sales levy, to 19% from 16%. The forecast was based on the median of 39 economists. The confidence gauge was expected to fall to 109.8 in January from an initially reported 110.1 in December, according to a separate survey.

The ECB raised its benchmark interest rate for the sixth time in a year last month to contain price increases below the 2% ceiling. Investors are betting the central bank will increase the rate twice more this year, with the next increase expected in March, futures trading indicates. The inflation data „doesn't alter the near-term outlook” for interest rates, Barry said.
M3 money supply, which the ECB uses as a gauge of future inflation, expanded 9.7% in December from a year earlier, the most in almost 17 years. Bundesbank President Axel Weber said January 26 the bank needs to take „this process of withdrawing monetary stimulation further” and Italian colleague Lorenzo Bini Smaghi said a day later borrowing costs are still „accommodating.” Oil traded at $56.47 a barrel today, compared with a record $78.40 on July 14.
Still, Ireland's central bank said in a report yesterday that euro-area inflation risks include a rebound in oil prices and the possibility of a pick-up in wage growth in a stronger economic environment. The decline in the euro-area jobless rate forces it further below what economists call its natural rate, that at which inflation begins to push up because workers demand higher wages. The European Commission now calculates that level to be at 7.8%, below the peak of 9.2% in 1997. (Bloomberg)