The euro zone economy is recovering but faces inflationary pressure from expensive energy, March unemployment and producer price data showed today, pointing to rate rises by the European Central Bank.
The European Union's statistics office said energy helped boost prices at factory gates in the 12 countries using the euro by 0.4 per cent month-on-month, versus market expectations of 0.5 per cent, for an expected year-on-year gain of 5.1 per cent.
"PPI inflation showed that pipeline inflation pressures are still in place but are trapped in the early stages of the production chain with capital and consumer goods price inflation at 1.5 per cent or below," said Edward Teather, economist at UBS.
"It does show there are inflationary pressures, but they are not moving down the supply chain terribly quickly."
Nevertheless, consumer inflation rebounded to 2.4 per cent year-on-year in April from 2.2 per cent in March, Eurostat's first estimate showed last week, in what economists expect to be the effect of oil prices spiking to new highs.
Unemployment eased to a four-year low of 8.1 per cent, Eurostat said, thanks to declines in Germany, the Netherlands, Portugal and Finland, defying expectations it would be flat at February's 8.2 per cent.
"In general the fall in the unemployment rate will stimulate spending in the near future and provide the final plank to a broader-based euro zone recovery," said Matthew Sharratt, economist at Bank of America.
The improvement in the labour market, which is likely to boost consumer demand, and producer price rises that would eventually be passed on to consumers point to risks for headline inflation, economists said.
The ECB wants to keep such inflation below but close to 2 per cent. "This means the ECB will continue to raise interest rates on the risk of higher inflation, rather than actual evidence that the price pressures are turning into inflation on the high street," Mr Teather said.
The ECB's main interest rate is now at 2.5 per cent after increases of 25 basis points each in December and March. Economists expect the next rise in June and further increases later, taking the key rate to 3.25 per cent by the end of the year.