Lower inflation may help ECB ease policy

Underlying inflation in the euro area eased for the first time in 10 months while factory activity contracted further last month, backing the case for the European Central Bank to slow the most aggressive interest-rate hiking campaign in its history this week.

Consumer prices, stripping out volatile items like fuel, and food costs, rose 5.6 percent from a year ago in April - down from March's record 5.7 percent advance and in line with estimates. Headline inflation, meanwhile, ticked up to 7 percent - a touch more than the 6.9 percent analysts anticipated but still far above the 2 percent target. Services prices and a less favorable annual comparison for energy costs compared to in March drove the acceleration.

This could further tilt the debate over how much the ECB should raise borrowing costs tomorrow toward those advocating a downshift to a quarter-point.

These lower inflation data came as eurozone factory activity contracted further last month, while the cost of raw materials fell at the fastest pace in nearly three years, a survey showed yesterday.

The HCOB final manufacturing Purchasing Managers' Index, compiled by S&P Global, fell to 45.8 in April from March's 47.3, just beating a preliminary reading of 45.5 but well below the 50 mark separating growth from contraction for a 10th consecutive month.