Euro zone inflation stable at ECB target


Euro zone annual inflation held steady at the European Central Bank (ECB) target for the fourth month in a row in May.

European Union statistics office Eurostat said prices in the 13 countries using the euro rose 0.2 per cent month-on-month for a 1.9 per cent year-on-year gain.

The annual figure came in line with Eurostat's early estimate and market expectations.

The ECB wants to keep inflation below but close to 2 per cent and has been raising interest rates since December 2005 to keep price growth in check amid robust economic growth and a tightening labour market.

Inflation excluding volatile unprocessed food and energy costs, which the ECB calls core inflation, also was 0.2 per cent month-on-month and 1.9 per cent year-on-year, with the annual rate again unchanged since February.

The bank watches the core inflation rate closely in its monetary policy decisions to determine the pass-through of higher oil prices into price increases in other sectors.

The bank last raised rates to 4 per cent last week. Markets expect it to do so again in September and possibly once more after that, taking borrowing costs to 4.5 per cent to stem inflationary pressures from fast credit growth and possibly higher-than-expected wage rises.

But Eurostat data showed that the increase in unit labour costs in the euro zone was stable at 2.2 per cent year-on-year in the first quarter of 2007, with wage growth slowing to 2.3 per cent annually from 2.4 per cent in the last quarter of 2006.

In the euro zone's biggest economy, Germany, where wage talks are still under way in some sectors, unit wages inched up only 0.1 per cent in the first three months of the year, after an 0.8 per cent increase in the last quarter of 2006.