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Oil drives up euro zone factory prices in July

Fitters work on a submarine at Perry Slingsby Systems factory in York, England.

Jim Ross/The Globe and Mail

Euro zone factory prices rose more than expected in July despite the currency area's economic slump, with the rising cost of energy complicating the European Central Bank's task of keeping inflation down while trying to revive the economy.

Prices at factory gates in the 17 countries using the euro rose 0.4 per cent in July, ending a two-month run of falls, the EU's statistics office Eurostat said on Tuesday. That compared to a consensus expectation of a 0.2-per-cent rise in the month among economists polled by Reuters.

The ECB cut interest rates to a record low of 0.75 per cent in July after a cooling of energy prices in May and June, with Brent crude under $100 a barrel at the time.

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But tensions between Iran and the West over Tehran's nuclear ambitions have persisted and driven crude back higher, with Brent at around $115 a barrel on Tuesday.

Consumer inflation in the euro zone has been well above the ECB's target of just below 2 per cent for more than a year and is proving to be sticky. Mainly because of oil prices, annual consumer inflation rose to 2.6 per cent in August, Eurostat said, the 20th month in a row that it has been above the target.

The United States is debating whether to release of strategic oil reserves to cool prices, a plan supported by Britain and France, but opposed by Germany and Italy.

Eurostat's reading of industrial producer prices in July showed energy jumping 1.6 per cent after falling in April, May and June. At a time when the euro zone's economy is in recession for the second time in just three years, devastated by its debt crisis, producer prices excluding energy and construction were much more muted, rising just 0.1 per cent in July.

Prices for capital goods, mainly machinery, were unchanged from June, and non-durable consumer goods, which include cosmetics and cleaning products, rose 0.2 per cent.

With one in 10 workers out of a job and the bloc's economy expected to contract by at least 0.3 per cent this year, the ECB is trying to cut the cost of borrowing for companies and households, but is not expected to cut rates again at its meeting on Thursday.

Expectations are instead for the announcement of a bond-buying plan that has divided ECB policy makers over whether the plan breaks EU rules and directly finances euro zone economies.

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ECB president Mario Draghi told European lawmakers on Monday that purchases of short term sovereign bonds would not breach those rules.

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