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Euro zone inflation easing may be temporary

Brussels, August 17, 2011

Inflation in the euro zone eased in July from preceding months' peaks due to statistical changes that the European Central Bank may ignore when deciding whether to hike interest rates for a third time this year.

Eurostat said consumer prices overall in the 17 countries using the euro fell 0.6 per cent month-on-month in July and rose 2.5 per cent year-on-year, confirming the initial estimate it gave at the end of July.

In June, annual inflation was 2.7 per cent.

Declining prices of clothing, traditionally sold at a discount in many countries in July, partly offset a continued impact of energy and fuel costs compared with 2010 levels.

Excluding volatile unprocessed food and energy costs -- what the European Central Bank calls core inflation -- prices fell by 0.8 per cent month-on-month and rose by 1.5 per cent year-on-year, down from 1.8 per cent in May.

The ECB has twice raised interest rates this year in its bid to keep the headline consumer price index below, but close to 2 per cent, and initial reading of the July data might suggest  pressure for it to act again has eased.

However, economists said that a change in the handling of seasonal pricing, notably in Italy, had strongly influenced the numbers, meaning the decline may be a temporary blip rather than a reversal of the previous upward trend.

Clothing prices in Italy were 8.8 per cent lower than in July than a year earlier and 21.1 per cent down month-on-month, according to figures from Italy's statistics office last week.

"If I had my ECB hat on I would say: 'look at the trend, not at one month's figures'. The main reason is the change of methodology in Italy. There's a distortion there that is giving a misleading impact on the overall figures," said BNP Paribas economist Ken Wattret.

He added that he expected headline inflation to pull up to around 3 per cent in September, only really moderating in 2012.

Italy's headline inflation rate dropped to 2.1 per cent from 3.0 per cent in June, while in Austria, Belgium, Germany, Estonia, the Netherlands and Finland it rose. Economists said the statistical changes would probably impact August as well.

"This is temporary and will disappear in September and I don't think the ECB will take it into consideration," said Mario Cominetta, economist at UBS.

"I think the ECB's main focus will be on oil prices in the months to come, because if the fall in prices that we've seen continues, this will certainly reduce the reasons for the ECB to hike rates, given that this is coupled with slowdown in overall activity.”

Indeed, rising fuel and electricity prices were responsible for keeping headline inflation above the ECB's target.

Eurostat said fuels for transport added 0.51 per centage points to the final annual reading, heating oil was responsible for 0.19 points, and electricity and gas for 0.14 and 0.10 per centage points respectively.

Motor fuel prices were 13.3 per cent higher than in June last year and heating oil prices greater by 23.7 per cent.

Month-on-month, package holidays, hotels, rents and air travel were the main upward drivers, partly offset by monthly declines in clothing, fruit and vegetables. – Reuters




Tags: Central Bank | inflation | Brussels | Eurozone | July |

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