Euro zone inflation slows as firms hold back on hiring

EURO ZONE inflation slowed in August, led by energy costs, as companies held back from hiring amid signs the recovery is losing momentum.

Consumer prices in the 16 euro countries increased 1.6 per cent from a year earlier after rising 1.7 per cent in July, the EU statistics office said, in line with an initial estimate published on August 31st.

Payrolls in the region were unchanged in the second quarter from the previous three months, a separate report showed.

Companies may find it difficult to pass on higher costs as unemployment near a 12-year high discourages consumer spending and governments cut spending to plug budget deficits.

The European Commission reduced its inflation forecast for 2010 on Monday, and European Central Bank council member Yves Mersch said last week that the situation called for “caution.”

Consumer prices rose 0.2 per cent in August from July, when they dropped 0.3 per cent, the report showed. Energy-price inflation eased to 6.1 per cent last month from 8.1 per cent, while core inflation, which excludes volatile costs such as energy, held at 1 per cent.

Euro zone inflation may average 1.4 per cent this year instead of a previously projected 1.5 per cent, the commission said this week. Economic growth would probably weaken to 0.5 per cent in the current quarter from 1 per cent in the previous three months.

Growth in services and manufacturing industries slowed in August and unemployment held at 10 per cent in July.

Payrolls fell 0.6 per cent in the second quarter from a year earlier, the report showed. Wage costs rose 1.6 per cent in the year, the weakest since the data was first compiled in 2000, according to a report yesterday.

International Monetary Fund managing director Dominique Strauss-Kahn said on Sunday that it was important for companies to add workers to bolster growth.

Europe faced the risk of a “sluggish recovery”, he said.

“Growth will somewhat slow down in the second half of the year,” EU commissioner for economic and monetary affairs Olli Rehn said on Monday in Brussels.

“We must stay alert and vigilant in the face of remaining uncertainties.” – (Bloomberg)