Energy bolsters euro zone prices but ECB has room to move

Consumer price inflation was confirmed at the 3 percent level for the third consecutive month, the European Union's Statistics Office Eurostat said, in line with expectations.

But stripping out energy, food, alcohol and tobacco, consumer prices fell 0.1 percent in the month -- another sign of the 17-nation euro zone's weakening economy.

"Inflation has peaked," said Raphael Brun-Aguerre, an economist at JP Morgan. "This number in November is probably the highest of this cycle. It should give the ECB more space to manoeuvre," he said.

The European Central Bank cut its main interest rate back to a record low of 1 percent on December 8 to try to boost the economy as inflation pressures subside, and economists expect further cuts early next year.

"The ECB has given itself some room by no longer stating that inflation will be in line with price stability over the medium term," Morgan Stanley said in a report to clients.

Energy prices were by far the biggest influence on the euro zone index, rising 0.7 percent in November on a monthly basis.

Despite the slumping economy and its impact on the wider world economy, oil prices remain high, supported by growing tension in the Middle East over Iran's nuclear program.

Brent crude futures rose towards $106 on Thursday on worries over supply as major powers try to isolate Iran.

In the euro zone, fuels for transport and heating oil were the largest contributors to inflation on an annual basis, adding 0.48 percentage points and 0.22 percentage points respectively.

Still, many economists say inflation should come down from December, with the first reading below 2 percent possibly in April -- around the ECB's target level -- as the economy heads into a year-long downturn.

Euro zone GDP grew just 0.2 percent in the third quarter and economists expect it to contract in the fourth and also in the first three months of next year, likely sending the bloc back into recession after its two-year recovery from the worst global financial crisis since the 1930s.

"NO THREAT"

In that tough environment, Eurostat said on Thursday that employment fell 0.1 percent in the euro zone in the third quarter. The largest job cuts came in real estate and construction, as the bloc tries to recover from the bursting of a massive housing bubble that helped fuel the 2008/2009 global financial crisis and the ensuing European debt debacle.

The jobless rate in the euro zone rose to 10.3 percent in October, its highest level since the creation of the euro, although there is huge divergence between the 17 countries in the single currency area. German unemployment continues to fall, while the number of jobless in Spain is above 20 percent.

In Greece, the amount of people seeking work rose to 17.7 percent in the third quarter from 16.3 percent in the previous three-month period, the country's statistics service said on Thursday.

"Rising unemployment will likely put downward pressure on wage growth," said Martin van Vliet, an economist at ING. "The data reinforces the view that inflation is not a threat at the moment and will not remain stubbornly high for long."

The euro zone's struggle with government debt has eaten into the economy's growth rates, particularly since August when investors intensified their scrutiny of the bloc's problems, dumping banking stocks and pushing up borrowing costs for Italy and Spain to potentially unsustainable levels.

An EU leaders' summit last week failed to reassure investors that the euro zone is any closer to resolving the debt debacle, while policymakers' focus on cutting deficits is sidelining efforts to enact pro-growth reforms, economists say.

(Editing by Jan Strupczewski and Hugh Lawson)