Eurozone inflation jumps to 3 per cent in September

AP, Friday 30 Sep 2011

Rate is highest since October 2008 and makes the European Central Bank less likely to cut interest rates next week, say experts

Euro notes
Hands off the interest rates for now, as Eurozone inflation climbs unexpectedly (Photo: Reuters)

Inflation jumped to a startling 3.0 per cent in September in the 17 countries that use the euro, a surprise increase that makes it less likely the European Central Bank will cut interest rates as soon as next week to head off a recession partly stemming from the eurozone debt crisis.

The rate reported Friday from the European Union's statistics agency was the highest since October 2008 and represented a big increase from August's 2.5 per cent. The scale of the rise was unexpected.

The ECB, the chief monetary authority for the euro countries, has come under pressure to cut interest rates soon to ward off mounting signs of recession in the eurozone economy, which has come off the boil of late because of a waning global recovery and ongoing concerns surrounding Europe's debt crisis.

Leading economic indicators have been falling to the point where some predict a downturn is imminent, after a weak 0.2 per cent growth figure for the second quarter. Separate figures Friday from the statistics office showed unemployment in the eurozone stuck at 10 per cent in August.

A few economists have predicted a cut next week. But the bank's rate-governing council may want to see evidence that inflation is not a threat before it cuts. September's rate, which is further above the ECB's mandate to keep inflation just below 2 per cent, may mean a cut that soon is even less likely.

"The latest eurozone CPI inflation and unemployment numbers would appear to reduce the chance of an imminent ECB rate cut," said Ben May, European economist at Capital Economics.

Ahead of the release, some economists had said a technical change in the way statistics are kept for seasonal goods could have an unexpectedly big impact on the headline inflation rate. Some economists expected little or no change while others had predicted a figure as high as 2.9 per cent.

The statistics office did not provide any details behind the surprisingly big increase. That will have to wait until the middle of next month when it publishes a more complete assessment.

However, German figures earlier this week showed inflation running at a higher than expected 2.6 per cent on the back of higher oil prices and increases in the prices of clothing and shoes as merchants put out new fall and winter offerings.

Even though inflation remains above target, many economists think the European Central Bank, which meets Thursday in Berlin for its next rate-setting meeting, could signal it is ready to cut its key rate from 1.5 per cent in the coming months.

Recession fears argue for cutting rates, since that stimulates growth by lowering borrowing costs for businesses.

The bank is also forecasting inflation to fall to 1.7 per cent on average next year.

Other recent inflation indicators, such as the EU survey of sales prices expectations, have been pointing down, and the recent slackening growth also bears down on price pressures. Last week Commerzbank changed its traffic-light inflation monitor to green, implying little risk of inflation.

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