Eurozone May inflation edges higher to 1.6pct

More expensive energy drove annual inflation in the Eurozone up slightly to 1.6 per cent in May as expected and wage growth acclerated in the first quarter, data showed on Wednesday, but underlying inflation pressures remained low.

Consumer prices in the 16-country bloc rose 0.1 per cent month-on-month and 1.6 per cent year-on-year, European Union statistics office Eurostat said on Wednesday. That was in line with market expectations and up from a 1.5 per cent annual increase in April.

"There is no inflationary threat on the horizon," said Clemente de Lucia, economist at BNP Paribas.

"While the depreciation of the euro is expected to fuel import prices, domestic pressures are muted. Core inflation (which excludes the most volatile components of the HICP and which is more related to domestic price developments) should resume trending down soon," he said.

What the European Central Bank calls core inflation, which does not include volatile prices of energy and unprocessed food, stood at 0.1 per cent month-on-month and 0.9 per cent year-on-year in May.

The ECB wants to keep inflation just below 2 percent over the medium term and watches the core number to gauge underlying inflationary pressures.

Economists expect the bank to keep interest rates, now at a record low of 1 per cent, on hold until 2011 as the economic recovery is still fragile.

"Underlying inflationary pressures continue to be held down by still significant output gaps across the region and only gradual recovery, muted capacity utilisation, and wage moderation amid high and still rising unemployment," said Howard Archer, economist at IHS Global Insight.

Eurostat said nominal hourly labour costs, adjusted for the number of working days, rose 2.1 per cent year-on-year in the first quarter of 2010 after a 1.7 per cent gain in the last three months of 2009.

Of the total, wages grew by 2.0 per cent year-on-year after a 1.6 per cent expansion in the previous quarter and non-wage labour costs rose 2.1 per cent, up from 2.0 per cent.

Wage growth in Germany, known for its cost restraint, was 1.0 per cent in the January-March period after a 0.3 per cent year-on-year fall in the previous three months.

Among countries whose competitiveness is under market scrutiny, Spain's wage growth continued at a brisk pace, rising 2.7 per cent in the first quarter from a year earlier.

Data for the first quarter in Greece was not yet available, but wages there grew by 4.1 per cent year-on-year in the final quarter of 2009.

In Portugal, wages froze in the first quarter after a 3.1 per cent rise in the fourth quarter of 2009.