By Todd Wailoo

FRANKFURT (MNI) – The one-off effects that led to a drop in
Eurozone consumer prices in July will unwind in coming months, leading
to pick-up in annual inflation rates, analysts said.

However, slowing global growth and easing pipeline pressures should
bring down inflation next year, allowing the European Central Bank to
pause in its tightening cycle, they predicted.

“Focusing on the very near term, I think that the very short drop
in inflation may unwind to a certain extent,” said ING European
economist Martin Van Vliet. “I would expect quite a rebound in core
inflation in the next one or two months.”

Consumer prices fell 0.6% in July on cheaper seasonal foods and
especially clothing (-14.2%), which trimmed the annual rate to 2.5% from
2.7% in June. The various core inflation rates declined by 0.2-0.4
percentage point after stabilizing in previous months.

New methods for harmonizing inflation data in Europe have widened
the number of items subject to seasonal movements, including retailer
discounts, explained BNP Paribas analyst Ken Wattret.

“In the case of Italy, the new methodology has been applied only
from January this year, causing a distortion in the annual inflation
rate when seasonal price changes are at their peak, as now,” the
economist said. “The implication is that the sharp decline in Italian
inflation in July should be seen as a temporary phenomenon.”

Italy’s HICP rate dropped from 3.0% in June to 2.1% in July, while
its CPI rate, which aims to smooth out seasonal effects, was steady at
2.7%. “Italy’s CPI reading is more indicative of the underlying trend
than the HICP, suggesting inflation was broadly stable in July,” Wattret
argued.

Eurozone core inflation “will bounce back in September when the
price drop induced by the summer sales will be reversed,” said Marco
Valli at UniCredit. “This means that headline inflation will probably
move sideways in August, but will re-accelerate significantly in
September.”

ING’s Van Vliet expects a more modest pick-up in HICP to around
2.6%. “I think we’re not going to see 3% this year. It has sort of
peaked, but there will be a gradual descent, and it could slip below 2%
over the course of next year.”

With food and energy inflation likely to ease in the coming months,
Capital Economics’ Ben May expects a sharp slowdown in HICP. “Given the
weak underlying outlook for growth in the Eurozone, we certainly would
think that the core will fall back too.”

Wattret foresees “a moderate, upward trend in core inflation” later
this year “ahead of a deceleration in 2012.” Given the delays before
waning factory-gate price pressures reach the shopping cart, “upward
pressure on consumer prices will persist over the next few months before
easing next year,” he said.

Professional forecasters surveyed by the ECB last month projected
Eurozone inflation at 2.6% this year and 2.0% next year — up 0.1 point
from the averages in the April survey. Since then, prices for oil and
most commodities have dropped.

Nick Matthews at Royal Bank of Scotland sees little chance of
similar movements in the ECB staff’s own inflation projections due out
next month.

“I think there’s more chance of a more significant revision on the
GDP growth forecasts than the inflation forecasts,” Matthews said. “It
will be the GDP forecasts that will be the most significant in terms of
signaling that the ECB is at a point of pause here.”

“There are some obvious inflation pressures that exist from oil
prices,” he said. “But I think, overall, the general outlook is that
inflation is probably under control. That is why, from our perspective,
we see from the ECB a prolonged pause in interest rates.”

ING’s Van Vliet agreed: “Obviously, the economic slowdown is
dampening the inflation outlook. That in itself should allow the ECB to
refrain from further rate hikes” until “the first half of next year,
or possible even later.”

— Frankfurt bureau: +49 69 720 142; email: twailoo@marketnews.com —

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