May: +0.1% m/m, +1.6% y/y

April: +0.5% m/m, +1.5% y/y
—

FRANKFURT (MNI) – Eurozone consumer price growth continued to slow
as generally expected in May, with cheaper food partially offsetting
higher energy and recreation prices while core inflation remained
subdued, Eurostat reported on Wednesday.

The price index increased 0.1% m/m in May, leaving annual inflation
at +1.6%, its highest level since December 2008, and in line with
preliminary estimates.

Energy prices led the way in gains among the larger components of
the index, rising 0.6% and 9.2% on the month and year respectively.
Recreation and culture costs, boosted by the 1.8% monthly gain in
package holiday prices, increased 0.4% from April, though they were down
0.3% on the year.

Conversely, food prices were 0.2% lower on both the month and year.

Excluding energy and food, along with alcohol and tobacco prices
(+0.4% m/m, +4.4% y/y), core inflation slowed to a monthly rate of 0.1%,
leaving annual growth unchanged at +0.8%, the lowest level on record.

The core rate used most often by the European Central Bank, which
factors out the effects of both energy and unprocessed food, came to
+0.1% and +0.9% on the month and year, respectively.

While energy’s impact on the price index should decline in the near
term, food price growth could lift CPI more than expected over the next
10 years, the Organisation for Economic Cooperation and Development
(OECD) and the Food and Agriculture Organisation (FAO) said in their
latest joint agricultural outlook report.

“Sustained economic growth in emerging markets is an important
factor underpinning growing demand and higher prices,” the report read.

In addition, growing biofuel supply will push up demand for wheat,
coarse grains, vegetable oils and sugar, thereby adding to upward price
pressures, while high energy prices could also spill over into food
costs, due to the intensive use of fertilizers in both Europe and the
U.S.

Nevertheless, other factors could offset future commodity price
gains. Since hitting four-year lows versus the U.S. dollar in June,
the euro has staged a modest comeback. A growing number of analysts
expect the single currency to appreciate further in the near term, which
would dampen imported inflation and, by extension, overall HICP.

High unemployment and ongoing weakness in wage growth should also
help to keep domestic inflationary pressures limited in the short term.

“Looking further ahead, inflation rates should overall remain
moderate,” ECB President Jean-Claude Trichet said last week. “Upward
pressures on commodity prices may persist, while euro area domestic
price pressures are expected to remain low.”

The central bank’s most recent staff projections point to inflation
ranging between 1.4% and 1.6% this year. For 2011, consumer price growth
was forecast at a range of 1.0% to 2.2%.

“Inflation expectations over the medium to longer term continue to
be firmly anchored in line with the Governing Council’s aim of keeping
inflation rates below, but close to, 2% over the medium term,” Trichet
said.

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

[TOPICS: M$X$$$,MT$$$$,M$XDS$]