Underlying Inflation Weakens as ECB Prepares for Crucial Meeting

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Underlying price pressures in the euro area remain weak, according to the latest inflation figures for the region, giving European Central Bank policy makers more to digest ahead of their crucial meeting next week.

Core consumer-price growth, which strips out volatile components such as energy and food, unexpectedly slipped to 1 percent from 1.1 percent, Eurostat said Friday. The headline rate came in at 1.5 percent, up from 1.4 percent a month earlier.

The report offers some of the last major pieces of information before the ECB's March 7 meeting, when officials will gauge whether the economic slowdown is serious enough to require a fresh monetary boost. While some policy makers have started to lay the groundwork for action, others including the institution's chief economist-in-waiting Philip Lane are confident inflation will eventually rise on the back of stronger wages.

Unemployment in the euro-area was at 7.8 percent in January, staying at the lowest in more than a decade.

A Purchasing Managers' Index showed factories suffered their biggest drop in orders in almost six years in February. At the same time, economic confidence in the euro area extended its decline, although a solid performance in services offered a cautious reason for optimism.

ECB officials have flagged that they expect to cut their economic forecasts for this year. Whether the current weak phase will have implications for their medium-term outlook and thus monetary policy is less clear.

Economists surveyed by Bloomberg predict policy makers will take their time assessing the situation before offering new long-term loans. They also pushed back their expectations for when interest rates will start to rise.

--With assistance from Kristian Siedenburg, Harumi Ichikura and Catarina Saraiva.

To contact the reporter on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Jana Randow

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