September: +3.0% y/y

MNI survey median: +2.6% y/y
MNI survey range: +2.3% to +2.9% y/y

August: +2.5% y/y

FRANKFURT (MNI) – Annual inflation in the Eurozone jumped to 3.0%
in September from 2.5% in August, the highest rate since October 2008,
Eurostat reported on Wednesday.

The headline figure was considerably higher than expectations of
analysts, who had forecast an HICP rate of between 2.3% and 2.9% with a
median of 2.6%.

Today’s annual figure suggests inflation in the Eurozone rose 0.7%
on a monthly, according to calculations by Market News International. A
detailed breakdown will not be published before October 14.

Headline inflation is expected to remain well above the ECB’s 2%
price stability threshold through most of 2011, a point strongly
underscored by today’s much higher-than-expected figure, and by
unexpected jumps in September inflation figures this week out of Germany
and Spain.

In Germany, the rise in HICP was driven by gains in energy prices
and a rebound in clothing and shoe prices.

In its interim forecasts for September, the EU Commission said
inflation would stay above 2% in the second half of 2011 and ease only
gradually towards the end of the year.

The European Central Bank has said repeatedly that it expects
inflation to stay above 2% through most of this year. However, it sees
HICP dropping back down next year comfortably below its inflation
threshold. The ECB staff’s most recent forecasts yielded a midpoint HICP
forecast of 1.7% in 2012. That forecast is in line with those of other
international institutions.

The ECB has acknowledged this more benign medium-term inflation
outlook in its latest official assessment of price stability risks,
saying they are now “broadly balanced” and no longer “on the upside.”
The International Monetary Fund went even further in its World Economic
Outlook, published last week, citing “declining inflation” and “downward
risks” to price stability.

The recent decline in oil prices, if sustained, would reinforce the
trend towards easing price pressures as the global and Eurozone
economies slow sharply.

Evidence of decelerating price pressure is showing up in the
pricing practices of European companies. The September flash Eurozone
PMI, published last week, showed that average prices charged by firms
fell, albeit only very slightly, for the first time since July of last
year. The downward move was led by the services industry, which posted
its first decline in prices since January.

The PMI survey also found that prices charged for manufactured
goods rose only modestly, showing the smallest increase in 18 months —
in sharp contrast to the record rate of inflation seen back in March.
Input prices also eased further, posting the weakest rise since January
of last year.

The next ECB rate setting meeting is scheduled for October 6 and
despite some anticipation that the bank could cut interest rates —
given the easing of pipeline price pressure and the increasingly
negative outlook for the region’s economy — today’s strong HICP reading
is likely to dampen those expectations.

As it is, several ECB officials have already sought to dampen talk
of a rate cut.

Governing Council member Yves Mersch said that speculation of a big
50 basis cut amounted to “wild expectations” by people who were not in
touch with the central bank’s inflation mandate. Board member Bini
Smaghi said the situation today was not the same as it was in autumn of
2008, when the ECB cut rates sharply only three months after having
raised them. This October will be three months since the ECB’s July rate

— Frankfurt bureau: +49 69 720 142, email: