Euro zone inflation jumped to its highest in six and a half years in November and inflation expectations rose, but economic growth was set to slow, highlighting the European Central Bank's rate dilemma.
The European Union's statistics office estimated that consumer prices in the 13 countries using the euro rose 3.0 per cent year-on-year, up from 2.6 per cent in October. This is the highest since May 2001, when inflation hit a record 3.1 per cent.
Economists had expected 2.9 per cent for November.
The ECB, which meets on interest rates next Thursday, wants to keep inflation just below 2 per cent over the medium term but has been in a wait-and-see mode since September to assess the full impact of the global credit crunch on the economy.
The ECB said it would take extra steps to ease banks' worries about funding around the end of the year as a scramble for cash pushed the cost of three month euro money to fresh 6.5 year highs above 4.8 per cent, well over the ECB's 4.0 per cent policy rate.
Economists said the credit squeeze also showed in the European Commission's monthly sentiment survey for November which showed another decline in confidence, led by consumers and the services sector.
"Our gut feeling is that GDP has just entered a path of moderately below-trend growth, which should last at least until spring 2008," said Marco Valli, economist at Unicredit.
"Given that financial markets remain unsettled and the currency has the potential to appreciate further, risks to our view are on the downside," he said.
The slowdown will follow a rebound in growth in the third quarter, which Eurostat confirmed on Friday at 0.7 per cent quarter-on-quarter and 2.7 per cent year-on-year against 0.3 percent quarterly growth in the previous three months.
It was driven mainly by household consumption, investment and inventory growth, which offset a negative contribution from net foreign trade.