Bloomberg News

Europe Inflation Unexpectedly Quickens, Complicating ECB’s Task

September 30, 2011

(See {EXT4 <GO>} for more on the European debt crisis.)

Sept. 30 (Bloomberg) -- European inflation unexpectedly accelerated to the fastest in almost three years in September, complicating the European Central Bank’s task as it fights the region’s worsening sovereign-debt crisis.

The euro-area inflation rate jumped to 3 percent this month from 2.5 percent in August, the European Union’s statistics office in Luxembourg said today in an initial estimate. That’s the biggest annual increase in consumer prices since October 2008. Economists had projected inflation to hold at 2.5 percent, according to the median of 38 estimates in a Bloomberg survey.

Faster inflation increases pressure on an economy already hurt by tougher austerity measures and waning investor confidence as governments struggle to contain the fiscal crisis. European economic confidence slumped more than economists forecast this month and German retail sales fell the most in more than four years in August. Commerzbank AG said today that the region “looks set to slip into a recession.”

“It’s more of a technical thing than a fundamental change,” said Laurent Bilke, global head of inflation strategy at Nomura International Plc in London, which was the only bank to forecast the right inflation rate in the Bloomberg survey. “The ECB is not going to cut in October and obviously strong inflation doesn’t give them much room for maneuver on that side. They will probably need a few more months of negative economic news to get there, maybe in November or December.”

The euro extended declines after the report, trading at $1.3493 at 12:49 p.m. in Brussels, down 0.7 percent on the day. The Euro Stoxx 50 Index dropped as much as 2.3 percent.

Greek Default

Investor concern that European governments may be unable to contain the debt crisis and prevent a Greek default has weighed on equity markets and pushed the euro lower. Germany’s benchmark DAX Index has shed 21 percent over the pasts two months, with the Stoxx Europe 600 Index down 14 percent.

The ECB, which aims to keep annual gains in consumer prices just below 2 percent, said earlier this month that inflation may average 2.6 percent this year and 1.7 percent in 2012. Economic growth may weaken to 1.3 percent next year from 1.6 percent in 2011, it said.

Italy’s harmonized inflation quickened to 3.5 percent in September from 2.3 percent in August. In Germany, Europe’s largest economy, inflation also accelerated more than economists forecast this month, with consumer prices rising 2.8 percent from a year earlier, up from an annual 2.5 percent. Spain’s harmonized inflation rate jumped to 3 percent from 2.7 percent. There’s no September data available for France.

ECB Measures

With companies reluctant to boost hiring and increasing price pressures eroding their purchasing power, consumers may keep spending plans on hold. European economic confidence dropped to the lowest in almost two years this month and services output contracted.

Still, ECB officials have indicated the central bank is more likely to take non-standard measures first before resorting to rate cuts. Council members Ewald Nowotny and Luc Coene signaled the ECB may offer banks unlimited liquidity for as long as a year, while a euro-area central banking official speaking on condition of anonymity said policy makers will also debate restarting their covered-bond purchases.

“We suspect the ECB may be reluctant to cut interest rates in the near term,” said Martin van Vliet, an economist at ING Groep NV in Amsterdam, calling today’s report a “bombshell.” The central bank “may instead opt to take steps to improve market functioning.”

Rate Cut

ECB President Jean-Claude Trichet, who will retire at the end of October, said on Sept. 8 that inflation rates are “likely to stay clearly above” 2 percent in the coming months before falling below the central bank’s ceiling in 2012. This assessment is based on “moderate economic growth,” he said. Trichet will be succeeded by Italy’s Mario Draghi.

Howard Archer, chief European economist at IHS Global Insight in London, said Draghi “may be reluctant to see interest-rate cuts straight away” when taking over.

“Despite the jump in inflation in September, there is evidence that underlying euro-zone price pressures are abating in the face of weakened economic activity and high unemployment,” he said. “An ECB move as soon as next Thursday is unlikely.”

The statistics office will release a breakdown of September consumer prices next month. Euro-region core inflation, which excludes volatile costs such as energy, held at 1.2 percent in August from the previous month.

--With assistance from Kristian Siedenburg in Vienna. Editors: Jones Hayden, Jennifer Freedman

To contact the reporter on this story: Simone Meier in Zurich at smeier@bloomberg.net

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


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