TV dinners and staycations cut euro zone inflation

BRUSSELS Fri Dec 14, 2012 8:51am EST

A tram is seen in downtown Lisbon November 26, 2012. REUTERS/Rafael Marchante

A tram is seen in downtown Lisbon November 26, 2012.

Credit: Reuters/Rafael Marchante

BRUSSELS (Reuters) - Europeans' reluctance to spend on travel and eating out slowed increases in the cost of living in the euro zone in November, abetted by a deteriorating ability of the economy to generate jobs.

Business surveys, meanwhile, pointed to a continued contraction in the economy.

Annual inflation in the 17 countries sharing the euro was 2.2 percent in November, the EU's statistics office Eurostat said on Friday, falling to just above the European Central Bank's target and ending months of sharp price rises.

While good news for households struggling through the euro zone's public debt and banking crisis, the cooling inflation also underscores the stagnant economy where business is so slack that companies cannot pass on price increases to customers.

Employment in the single currency area also fell 0.2 percent in the third quarter from the second, Eurostat said, showing a worsening of the bloc's job rate since the summer in Europe.

The bloc's 9 trillion euro economy slipped into its second recession since 2009 this year and policymakers are divided over whether it will rebound quickly, or at all, in 2013.

Data researcher Markit said it purchasing managers indexes for the fourth quarter were compatible with continued contraction, even though there was some improvement in the December numbers.

Many economists expect the ECB to cut its main lending rate to below 0.75 percent early in 2013 to try to revive the economy, but with the cost of borrowing already at a record low, such a move may not have much of an impact.

The slight improvement in the PMI manufacturing and services data may also deter the bank from cutting interest rates further.

"There may be one last chance for a cut of the refinancing rate, but the ECB doesn't have much ammunition left unless it is prepared to cut its deposit rate to below zero," said Nick Kounis, head of macroeconomic research at ABN AMRO.

A cut in the deposit rate, which is now at zero, would charge banks for keeping funds with the ECB, encouraging banks to lend money and freeing up money for smaller businesses.

"There is a more significant hurdle compared to traditional policy because it's not something you do lightly," he said.

At its last meeting on December 6, the ECB's Governing Council touched on the idea of taking its deposit rate into negative territory but did not elaborate.

Still, the ECB does have more room to manoeuvre now that inflation is coming down after peaking at 3 percent a year ago.

CHEAPER HOLIDAYS

French inflation eased more than expected in November to the lowest in over two years, while inflation in Greece, which is sunk in an economic depression, was just 0.4 percent.

Household spending in euro zone, constrained by government cuts and record unemployment, was mainly limited to food and clothing in November and overall, consumer price inflation fell 0.2 percent from October.

The cost of transport, recreation, culture and eating out at restaurant costs all slipped in the month, while package holidays fell 2.4 percent.

Stripping out energy inflation, consumer prices rose 1.4 percent, well below the ECB's target of just below 2 percent.

Even the cost of energy, which for most of 2012 was driven up by high world oil prices over tensions between the West and Iran's nuclear programme, slid by more than expected in November from October and could fall further.

"Over the coming months, we expect energy inflation to moderate further," said Gizem Kara, an economist at BNP Paribas.

Worries about the impact of possible impact of steep tax increases and spending cuts in the United States, as well as the euro zone's stalled economy, have capped the price of Brent crude, which traded at $109 a barrel on Friday.

That is down from near $120 a barrel in August. (Reporting by Robin Emmott; editing by Rex Merrifield/Jeremy Gaunt)