July: -0.6% m/m, +2.5% y/y
June: flat m/m, +2.7% y/y
May: flat m/m, +2.7% y/y
April: +0.6% m/m, +2.8% y/y
March +1.4% m/m, +2.7% y/y
—

FRANKFURT (MNI) – Eurozone consumer price inflation slowed as
expected in July, while remaining well above the European Central Bank’s
target for the eighth consecutive month, Eurostat reported on Wednesday.

The annual HICP rate eased to 2.5% from 2.7% in June, with prices
down 0.6% on the month, as cheaper food and clothing offset costlier
energy.

With base effects widening the annual rise in energy prices to
11.8% from 10.9%, transport fuel, heating oil, electricity and gas once
again had the strongest impact on the annual HICP rate, adding 0.94
percentage point.

Conversely, food, alcohol and tobacco price inflation slowed on the
year to +2.6% from +2.7%.

Excluding these two components, core inflation eased to a
five-month low of +1.2% from +1.6% in June.

Underlying the seasonal effects in July, clothing prices dropped
14.2% during the summer retailer discounts, with cheaper garment and
footwear prices knocking a combined 0.93 percentage point off the
monthly rate. On the upside, higher package holiday prices added 0.14
percentage point to the monthly rate.

The ECB’s preferred measurement of core prices, which factors out
energy and unprocessed foods, also hit a five-month low, easing to +1.5%
after accelerating to +1.8% in June.

In Germany, consumer prices rose 0.5% on the month, lifting annual
inflation to a three-month high of +2.6%. French prices, on the other
hand, fell 0.5% on the month, narrowing the annual rise to 2.1%.

In Spain, prices dropped 1.2% on the month, leaving the annual
inflation rate unchanged at +3.0%. Italian prices also lost ground,
dipping 1.7% to cut the annual rate to +2.1%.

Barring a significant drop in oil prices in the near term, base
effects should ensure that energy prices support overall inflation at
least until next year.

Still, companies’ ability to continue raising prices and maintain
profit margins may be called into question if demand continues to trend
downward.

The latest PMI surveys showed that output price inflation in the
service sector was little changed in July, while selling prices in the
manufacturing sector rose at their slowest pace since October.

A declining proportion of firms are looking to increase selling
prices in the near term, a European Commission poll indicated. Downward
revisions in selling price expectations were seen across most major
sectors, with only retailers looking to increase prices. Consumers also
indicated an upward revision to their assessment of price trends in the
next year after expectations troughed in June.

At his most recent press conference, ECB President Jean-Claude
Trichet highlighted the upside risks to price stability in the Eurozone
and projected inflation to remain above target in the months ahead.

“It remains of paramount importance that the rise in HICP inflation
does not translate into second-round effects in price and wage-setting
behaviour and lead to broad-based inflationary pressures,” Trichet said.
“Inflation expectations must remain firmly anchored in line with the
Governing Council’s aim of maintaining inflation rates below, but close
to, 2% over the medium term.

Central Bank of Luxembourg head Yves Mersch in a recent interview
echoed Trichet’s assertion that price stability risks were on the
upside. However, he also hinted that the recent drop in commodity prices
and slowing economic activity could lead the ECB to modify its inflation
assessment.

It’s “a close call” whether this may be adjusted to “balanced”,
Mersch said. “I would like to wait until we publish out next staff
projections in early September in order to make a final assessment.”

The ECB’s latest Survey of Professional Forecasters points to
inflation averaging +2.6% this year and slowing to +2.0% in 2012 and
+1.9% in 2013.

However, the probability of inflation being at or above 2.0% in
2016 increased further to 52% from 50% in the previous survey,
signalling that inflation expectations are becoming increasingly
unanchored. Since the SPF survey was first conducted, the 50% threshold
was breached only once before in the second half of 2008.

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

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