Inflation Is The Missing Link In Eurozone's Economic Revival

The eurozone economy is healing nicely but inflation remains weak, complicating the European Central Bank's plans to start phasing out its stimulus programs.

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BRUSSELS (AP) — The eurozone economy is healing nicely but inflation remains weak, complicating the European Central Bank's plans to start phasing out its stimulus programs.

That's the take-away from economic reports released Monday that showed while the unemployment rate in the 19-country currency union fell to its lowest in eight years, price increases are modest — possibly suggesting companies are cautious about raising prices and wages.

The number of people in work rose by 148,000 in June, the Eurostat statistics agency said Monday, bringing the unemployment rate to 9.1 percent, from 9.2 percent in May. That echoes reports in recent weeks of rising business activity and confidence across all eurozone countries — even those, like Greece, that have been hit hardest by financial troubles.

Such improvements have emboldened the European Central Bank to consider when it might signal a phasing out of its bond-buying stimulus program, under which it pumps 60 billion euros ($70 billion) a month into the economy. ECB President Mario Draghi has said it would likely consider such a move in the fall.

But the missing piece in the eurozone's recovery is a significant rise in inflation, which the ECB is tasked with getting to just under 2 percent.

In July, the annual inflation rate was stuck at 1.3 percent. And what gains there were were mostly due to energy price increases of 2.2 percent. Excluding volatile items like energy, food, alcohol and tobacco, prices were up a still-modest 1.2 percent. The industrial goods sector saw prices rise a mere 0.5 percent.

Economists say inflation is unlikely to rise substantially as long as there remains slack in the labor market that prevents wages from rising significantly.

"While June's unemployment data paint a positive picture of the eurozone labor market, July's (inflation) release confirms that this strength has yet to generate inflationary pressure," said Jennifer McKeown, chief European economist at Capital Economics in London.

She expects the ECB to start tapering off its bond-buying program next year, but says "interest rate hikes are a pretty distant prospect."

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