Euro zone inflation rose further above the European Central Bank's target in April, increasing the chances of an interest rate rise in June, despite a weakening of economic sentiment and household demand.
Inflation in the 17 countries using the euro rose to 2.8 percent year-on-year this month from 2.7 percent a month earlier, the highest level since October 2010, when it was 3.2 percent.
Consensus expectations had been for a flat reading compared to March ahead of next Thursday's European Central Bank meeting on interest rates.
I can imagine that some market participants will expect the rate increase by the European Central Bank at an earlier date. We expected June, the market is still expecting July. I guess the consensus will now move to June, said Piet Lammens, economist at KBC.
The ECB raised its main interest rate from record lows of 1.0 percent to 1.25 percent in April, concerned about the impact on consumer prices of rising costs of energy and food.
Other data this month has suggested growth in both Germany and the euro zone is peaking and figures from Spain, the biggest of the economies under threat in Europe's debt crisis, showed unemployment soaring and retail sales sinking.
A monthly European Commission survey showed economic sentiment in the euro zone as a whole fell for the second month in a row to 106.2 in April, down from 107.3 in March and below market expectations of a decline to 107.0.
Survey data from the European Commission clearly indicates that the combination of high oil prices, a strong euro, and fiscal and monetary tightening has started to dent the economic mood in the euro zone, said Martin van Vliet, economist at ING.
The decline in sentiment was in all sectors of the economy except construction, with consumer optimism falling the most to -11.6 from -10.6 in March.
NO LOAN BOOST
ECB data also showed that the annual growth rate of loans to the private sector in the single currency area slowed in March, bucking expectations for a rise, but M3 money supply growth accelerated.
Monetary data continue to point to a modest recovery in euro area money and loan growth, said Christoph Balz, economist at Commerzbank.
While the data in itself do not indicate upside risks to price stability that require further monetary tightening, they are further proof that the economic situation has changed substantially since 2009 -- which is why the ECB thinks that extremely low interest rates are no longer appropriate.
More evidence of weakening household demand could be seen in retail sales data.
Sales in Germany fell in March, defying expectations of a rise as consumers bought fewer groceries and textiles during a month when inflation surpassed the 2 percent threshold.
Adjusted for consumer price rises, sales declined by 2.1 percent month-on-month, and by 3.5 percent year-on-year.
The drop in consumer demand was more pronounced in the peripheral euro zone countries seeking to win back market confidence in their public finances with tough austerity measures.
In Spain sales fell 8.6 percent year-on-year in March and in Greece the decline was 10.6 percent in February.
Euro zone consumer inflation expectations, which have been rising quickly since November 2010, edged marginally lower to 30.7 from 30.8. Selling price expectations among manufacturers, on the rise since August 2010, fell more markedly to 21.5 from 24.4.
The European Commission's business climate indicator, which points to the phase of the business cycle, also fell for the second month in a row, to 1.28 points from 1.43 in March.
Despite this, the current level of the indicator remains close to historic peaks, suggesting that the recovery in industry will continue in the coming months, the Commission said.
Eurostat data also showed that unemployment in the euro zone held stable at 9.9 percent of the workforce in March.
(Additional reporting by Madrid, Berlin, Frankfurt and Athens bureaux; editing by Rex Merrifield and Patrick Graham)