UPDATE 1-Euro zone Aug inflation, jobless signal flat ECB rates

* Euro zone unemployment unchanged since March

* Euro zone August inflation 1.6 pct vs 1.7 pct in July

By Jan Strupczewski

BRUSSELS, Aug 31 (BestGrowthStock) – Euro zone inflation slowed in
August, pointing to steady interest rates well into 2011, but
unemployment remains high and uneven across the region,
underlining the two-speed recovery, data showed on Tuesday.

European Union statistics office Eurostat reported that
inflation in the 16-nation currency area fell to 1.6 percent
year-on-year in August from 1.7 percent in July, in line with
economists’ expectations and comfortably below the European
Central Bank’s target of just under 2 percent.

No breakdown of the inflation figure is available until next
month, but economists said the easing was most likely a result
of cheaper energy and lower core inflation, which excludes the
more volatile energy and food prices.

“Inflation will not be an issue for a period of one to two
years,” said Christoph Weil, economist at Commerzbank.

He said wages, which largely determine inflation, would rise
only moderately in 2010 and 2011 because high unemployment and
resulting fears of losing jobs will enforce wage constraint.

Eurostat said unemployment in the euro zone was unchanged at
10 percent of the workforce for the fifth month running — a
factor economists said was undermining household demand.

Inflation is also likely to be curbed by the still low
utilisation of production capacity and by fiscal tightening, as
governments try to shore up public finances in the wake of the
recession to win back market confidence in their policies.

“In 2011, we forecast an inflation rate of 1.7 percent,
after an expected 1.4 percent this year. The favourable
inflation outlook gives the ECB the scope to leave rates at
their very low level for the time being. We do not expect the
first rate hike before the end of 2011,” Weil said.

The ECB meets on interest rates on Thursday and economists
expect it will keep them at the historic low of 1.0 percent.

For full data on unemployment and inflation see:

Economists said the persistently flat euro zone unemployment
rate of 10 percent, near a 12-year high despite strong growth in
the second quarter, masked diverging trends in the single
currency area.

While unemployment in Europe’s powerhouse Germany has been
on the decline for 14 months in a row, and fell to 7.6 percent
in August, the opposite trend can be seen in Spain and Ireland
— where it rose to 20.3 and 13.6 percent in July respectively.

“We have the periphery countries where the labour market is
showing no improvement and we have the core euro zone where the
labour market is actually pretty good and continues to show good
news,” said Carsten Brzeski, economist at ING.

“The effect is, for long term policy, that rates will remain
on hold for a long while. It illustrates the divergence and the
two speeded recovery of the euro zone,” he said.

Germany’s economy expanded 2.2 percent quarter-on-quarter in
the April-June period while Spain grew 0.2 percent.

Economists note, however, that unemployment in Europe is
slow to react to a pick-up in economic growth, which in the
second quarter was 1 percent quarter-on-quarter, but is seen
slowing to 0.6 percent in the third quarter.
(Additional reporting by David Brunnstrom and Marcin Grajewski,
editing by Luke Baker)

UPDATE 1-Euro zone Aug inflation, jobless signal flat ECB rates