BRUSSELS (MNI) – Eurozone inflation probably slowed slightly in
June, with the absence of domestic price pressures offsetting a push
from food and commodities, analysts said.

The median forecast of a Market News International survey of
analysts is for an annual HICP rate of 1.5%, down from 1.6% in May. The
forecast range is 1.4% to 1.6%.

Risks are seen to the downside since the release of German states’
results gave a preliminary estimate of just 0.8% for the EU-harmonized
annual rate of the Eurozone’s largest economy, analysts cautioned. Most
had expected at least 1.0%.

Eurostat will release its flash estimate on Wednesday at 9:00 GMT.

“There’s the domestic disinflationary pressure, but we are likely
to have upwards pressure from food and energy prices, and the fall in
the euro will put upward pressure on import prices,” said Nick Kounis at
Fortis. “These factors could be roughly offsetting in the coming
quarters.”

For Carsten Brzeski at ING, “the German data are already quite
telling.” The outcome was weaker than expected “because of base effects,
with some drops in the prices for certain goods. This still shows that
the risk of deflation has not fully been prevented.”

While energy and food prices could keep rising, especially if the
euro’s slide continues into next year, the slack in Eurozone economies
and the impact on consumer and business sentiment of government
austerity measures should keep inflation in check, allowing the European
Central Bank to hold interest rates down until the middle or even the
end of next year, analysts argued.

“Core inflation is still very low at 0.6% and underlying price
pressure is very weak, although this could be offset by imported
inflation,” said Jennifer McKeown at Capital Economics. “This tells me
that the ECB is right to have a dovish stance and should stay that way
for a very long time.”

Clemente De Lucia at BNP Paribas said he expected ECB rates to
remain on hold throughout 2011. “Energy prices and the depreciation of
the euro could push inflation higher, but domestically it should
continue to decline, because core inflation is driven mainly by domestic
forces,” he explained.

The weak euro could ultimately help spark a recovery in some
Eurozone economies, especially those like Ireland, Germany and the
Netherlands, where a large share of trade is with non-euro partners, De
Lucia suggested.

“Given that we expect global demand driven by the Asian economies
to remain strong, those countries could benefit,” he said. Countries
like France, where exports are more concentrated within the Eurozone,
“could benefit less than others,” he added.

– Emma Portier Davis, Need to Know News.
Email: edavis@needtoknownews.com. Tel: +32 475 848 005.

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