Euro zone core inflation unexpectedly picks up in July

BRUSSELS/FRANKFURT (Reuters) - A key measure of euro zone inflation accelerated to a four-year high this month and euro zone unemployment fell to its lowest since 2009 in June, data showed on Monday, in two encouraging signs for the European Central Bank as it considers reducing its monetary stimulus.

The ECB is due to decide by the autumn whether and how to extend its 2.3 trillion euros (2.05 trillion pounds) quantitative easing programme into 2018 and President Mario Draghi has cited sluggish core inflation and wage growth as reasons to be cautious.

Likely giving heart to ECB policymakers, core inflation, which excludes volatile food and energy prices, accelerated to 1.3 percent from 1.2 percent in June, Eurostat’s flash estimate showed.

It was its highest level since August 2013 and confounded market expectations for a slowdown.

“Today’s upside surprise in core inflation is likely to give the ECB some comfort, even though its level remains low,” Morgan Stanley economist Daniele Antonucci said. “We expect a QE tapering announcement this autumn.”

The European Union’s statistics office estimated that headline growth in consumer prices in the euro zone was stable at 1.3 percent year-on-year in July, still far from the ECB’s objective of just under 2 percent.

In a separate release, Eurostat said unemployment in the 19-country currency bloc dropped to its lowest level since 2009 at 9.1 percent, confirming a robust recovery in the currency bloc.

The jobless rate also went down in Italy and Spain, the two eurozone countries with the highest rates, excluding Greece for which fresh data were not available.

In Italy unemployment dropped to 11.1 percent in June from 11.3 percent in May, meaning that nearly 60,000 were added to the Italian workforce. In Spain, the rate fell to 17.1 percent from 17.3 percent.

One of the ECB’s dilemmas is that a steady decline in unemployment is not translating into higher wages, a key driver of inflation.

In Germany, the largest economy of the bloc, unemployment fell to 3.8 percent in June from 3.9 percent the previous month, raising expectations of bigger wage rises that could strengthen growth in the euro zone a whole.

($1 = 0.8521 euros)

Reporting by Francesco Guarascio in Brussels and Francesco Canepa in Frankfurt @fraguarascio @FranCanJourno, editing by Alister Doyle