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Euro zone May inflation slows

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Euro zone inflation slowed in May largely thanks to lower oil prices, but the dip is likely to be temporary and will not stop the European Central Bank from raising interest rates in July.

European Union statistics office Eurostat estimated that inflation in the 17 countries using the euro was 2.7 percent year-on-year this month, down from 2.8 percent in April.

Economists polled by Reuters had expected inflation to stay at 2.8 percent year-on-year. The ECB wants to limit price growth to just below 2.0 percent over the medium term.

"I think they are still on target to increase interest rates by a further quarter point this summer, probably in July. Then I think we'll get one more this year bringing the refi-rate to 1.75 percent," said Martin van Vliet, economist at ING.

The ECB raised interest rates in April by 25 basis points to 1.25 percent to try to stem inflationary pressures in the euro zone following a sharp rise in commodity prices.

There is no breakdown or monthly data with the Eurostat inflation estimate, but economists said that once more details were published in mid-June, they were likely to show that energy prices fell sharply as a result of a drop in oil prices.

Food prices were likely to be on the rise again but core inflation, which excludes the volatile costs of energy and unprocessed food, was likely to have eased.

"Seasonal patterns will contribute to keep core inflation subdued over the next few months, but the underlying trend in core inflation is upwards, reflecting the gradual pass-through of higher commodity prices along the price formation chain," said Eoin O'Callaghan, economist at BNP Paribas.

"The ongoing moderation in economic activity will probably ease some of these pressures but will not change the overall picture. We expect core inflation to hit 1.7 percent year-on-year in December, from an estimated 1.5 percent this month and up from 1.1 percent in December 2010," he said.

"Headline inflation, overall, is expected to peak above 3 percent in the fourth quarter."

Eurostat said the unemployment rate in the euro zone was unchanged at 9.9 percent of the workforce in April for the third month, despite small declines in the number of jobless in Germany, France and Italy.

It said 15.529 million people were without jobs in the euro zone in April, 115,000 fewer than in the previous month and 457,000 fewer than a year earlier.

"With euro zone growth currently showing signs of losing some momentum, the suspicion remains that euro zone unemployment will trend down only gradually over the coming months," said Howar Archer, economist at IHS Global Insight.

"The jobs situation continues to vary markedly across the region, with improving labour markets in Germany, and other core northern euro zone economies contrasting with still very high unemployment in the struggling periphery economies," he said.

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