Bloomberg News

European Inflation Unexpectedly Slows, Still Above ECB Limit

July 29, 2011

(Updates with comment from economist in fourth paragraph.)

July 29 (Bloomberg) -- Euro-region inflation unexpectedly slowed in July, though it remained above the European Central Bank’s 2 percent ceiling for an eighth month as rising energy prices added pressure on companies to pass on higher costs.

The inflation rate in the 17-nation euro region declined to 2.5 percent from 2.7 percent in the previous month, the European Union’s statistics office in Luxembourg said today in an initial estimate. Economists expected price growth to hold steady, the median of 31 forecasts in a Bloomberg News survey showed.

A 6 percent gain in crude oil costs this year is sapping consumers’ purchasing power and pushing companies to raise prices to protect earnings just as the recovery falters. European Central Bank President Jean-Claude Trichet on July 7 signaled concern that price pressures may feed into wage demands and spark more persistent inflation after increasing borrowing costs a second time this year.

“The slowdown of inflation at the euro-area level is mostly related to very weak Italian numbers,” said Marco Valli, chief economist for the single-currency region at Unicredit Global Research in Milan. “It’s a technical issue. We will see a rebound of inflation in August and September.”

The euro pared losses after the data were released, trading at $1.4284 at 11:22 a.m. in Brussels, down 0.4 percent.

Italian Price Drop

Italian inflation, calculated using a harmonized European Union method, slowed to 2.1 percent in July from 3 percent in June as consumer prices dropped 1.7 percent in the month, Rome- based national statistics office, Istat, said in a preliminary report today. On a non-harmonized basis, Italian inflation held at 2.7 percent.

By contrast, inflation in Germany unexpectedly quickened in July to 2.6 percent from 2.4 percent in June. The threat of higher energy prices will contribute to a decline in consumer confidence in Europe’s largest economy in August, market research company GfK said this week.

The Frankfurt-based ECB last month forecast euro-region inflation to average 2.6 percent this year and 1.7 percent in 2012. Governing Council member Andres Lipstok wrote in Estonia’s Postimees newspaper on July 26 that “monetary policy interest rates remain very low in an historical comparison.”

Trichet said earlier this month that euro-region inflation will probably stay “clearly above” 2 percent over the coming months, calling risks to the outlook “on the upside.” Euro- region growth probably slowed in the second quarter from 0.8 percent in the previous three months, he said.

With the region’s recovery losing momentum as governments step up spending cuts to plug budget gaps, companies may find it harder to raise prices. Euro-region producer-price inflation slowed to 6.2 percent in May from 6.7 percent.

The statistics office will release a breakdown of July consumer prices on Aug. 17. Euro-region core inflation, which excludes volatile costs such as energy, quickened to 1.6 percent in June from 1.5 percent in the previous month.

--With assistance from Mark Evans in London. Editors: Patrick G. Henry, Jeffrey Donovan

To contact the reporter on this story: Simone Meier in Zurich at smeier@bloomberg.net; Jana Randow in Frankfurt at jrandow@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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