July HICP: +1.7% y/y

Previous: Jun +1.4%, May +1.6%, Apr +1.5%, Mar +1.4%, Feb +0.9%
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FRANKFURT (MNI) – Eurozone inflation jumped to 1.7% in July, its
highest annual rate in 20 months, driven mainly by energy prices,
Eurostat said Monday.

The figure confirms Eurostat’s initial “flash” estimate.

The acceleration in the annual rate was due mainly to base effects,
since the HICP index had hit a trough in July 2009. Monthly developments
showed prices resuming a downward trend after having risen or remained
stable in the previous five months. Compared to the previous month, July
consumer prices were down -0.3% after a flat month-on-month reading in
June.

Excluding energy, food, alcohol and tobacco prices, core inflation
in the Eurozone saw a modest acceleration of 1.1% annually. The core
rate most often used by the European Central Bank, which excludes energy
and unprocessed food prices, was at an even more benign 1.0%.

Eurostat said that the main components with the highest annual
rates in July 2010 were transport (4.5%), alcohol & tobacco (3.3%) and
housing (2.7%), while the lowest annual rates were observed for
communications (-0.8%), recreation & culture (-0.3%) and household
equipment (0.5%).

The main components with the highest monthly rates were recreation
& culture (1.2%), hotels & restaurants (1.1%) and transport (0.5%),
while the lowest were clothing (-9.7%) and household equipment (-0.6%).

Among Eurozone member states, the lowest annual rates were observed
in Ireland (-1.2%), and Slovakia (1.0%), and the highest in Greece
(5.5%) and Luxembourg (+2.9%)

Pipeline price pressures appear to be receding. Firms polled for
July’s purchasing managers index (PMI) reported a further slowdown in
industry input prices and the weakest rise in factory-gate prices in
four months.

Most experts expect price developments in the Eurozone to remain
subdued in the months ahead, according to the European Central Bank’s
Survey of Professional Forecasters, published last Thursday.

Survey participants kept their consumer inflation forecasts for
2010 and 2011 unchanged at 1.4% and 1.5%, respectively. For 2012,
forecasters see inflation rising to 1.6%.

The average 2010 HICP forecast is slightly above the ECB staff’s
midpoint projection of 1.5%. The 2011 average is slightly below the ECB
staff midpoint of 1.6%. Staff forecasts will be updated in September but
should not show significant upward revisions.

ECB President Jean-Claude Trichet said earlier this month that “in
the next few months annual HICP inflation rates are expected to display
some further volatility around the current level. Looking further ahead,
in 2011 inflation rates should remain moderate overall, benefiting from
low domestic price pressures.”

Subdued price developments should allow the central bank to keep
interest rates unchanged for some time.

However, results of the Survey of Professional Forecasters may have
sounded an alarm bell in the ears of the Governing Council’s hawks. The
survey showed long-term inflation expectations rising to 2.0% from 1.9%
in the previous survey. While seemingly a minor revision, 2% does not
qualify as meeting the ECB’s price stability target of close to but
below 2%.

Should this trend continue, concerns that loose monetary policy and
excess liquidity could lead to rising inflation expectations might move
price considerations back to the forefront of the ECB’s policy debate.

–Frankfurt newsroom +49 69 720 142; e-mail: frankfurt@marketnews.com

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