October 31, 2018 / 10:41 AM / 13 days ago

UPDATE 1-Euro zone inflation rise vindicates ECB stimulus curb

* Headline and core inflation both up

* Support ECB’s plan to end asset buys

* Low growth a worry (Adds detail)

By Jan Strupczewski and Balazs Koranyi

BRUSSELS/FRANKFURT, Oct 31 (Reuters) - Euro zone inflation accelerated last month, providing further rationale for the European Central Bank’s decision to dial back stimulus even as growth is slowing more sharply than most had forecast.

Consumer price growth in the 19 countries sharing the euro picked up to 2.2 percent in October from 2.1 percent last month, Eurostat said in a preliminary report, holding above the ECB’s target of just below 2 percent for the fifth month running.

Having unleashed unprecedented stimulus over the past four years, the ECB is now slowly clawing back support, satisfied that inflation is moving back to target, even if higher oil prices are accounting for much of the recent rise.

Even underlying inflation picked up finally, a comforting sign for the bank as it has argued for months that rising wages and record high employment are bound eventually to push core prices higher, even if with a significant lag.

Indeed, inflation excluding food and fuel prices rose to 1.3 percent from 1.1 percent, slightly beating expectations. An even more narrow measure watched by market analysts, which also excludes alcohol and tobacco prices, rose to 1.1 percent from 0.9 percent.

But the ECB’s plan to raise interest rates late next year may be challenged by alarmingly slow growth, which risked putting downward pressure on inflation and putting the ECB’s credibility on the line as it has missed its annual inflation target for five years.

Preliminary figures put third quarter growth at 0.2 percent, half of the ECB’s own expectation and the previous quarter’s figure.

For now the bank is playing down the steady stream of weak economic readings with ECB chief Mario Draghi calling it a slowdown rather than a downturn. He added that even when its asset buys end, policy will be exceptionally loose with rates still at record lows.

Still, economists say much will depend on whether growth can rebound in the last three months of the year as the third quarter’s level was below what is considered the bloc’s natural or potential rate.

Growth below potential would suggest that it stops absorbing spare capacity and inflation pressures will not be generated at the rate now expected. That is a problem as the ECB sees inflation only at 1.7 percent through 2020, a figure it argues still falls short of its mandate.

In separate data, Eurostat said euro zone unemployment in September was flat at 8.1 percent of the workforce with 13.153 million people without jobs, marginally up from 13.151 million in August.

The jobless rate has been falling steadily for years and has been holding steady at its lowest level since the euro zone’s debt crisis.

The ECB plans to end its bond purchases at the end of the year and guides markets for steady interest rates “through” next summer. (Editing by Peter Graff)

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