Eurozone Crisis: Inflation At Six Month High

by Wadsam | September 29, 2012 10:09 am

[1]Expectations of another interest rate cut from the European Central Bank (ECB) were weakened, after official figures showed inflation in the 17-nation eurozone rose to a six month high in September.

According to Eurostat on Friday, prices in the eurozone were 2.7 per cent higher in September compared with the year before, and up from the previous month’s 2.6 per cent rate. Analysts expected a decline to 2.4 per cent.

Eurostat did not provide any reasons for the increase as the figure was only a preliminary estimate, although higher energy costs are likely to blame. Further details will be released next month as the statistics office publishes a comprehensive report.

Economists believe that a sales tax in Spain and changes in the way Italian prices are measured could have also contributed to the increase.

The increase will likely prove to be another headache for ECB rate setters in the run up to next Thursday’s monthly policy meeting. The ECB has had to contend with a faltering eurozone economy and turbulent financial markets in trying to stick to its mandate of keeping inflation just below two per cent.

Six eurozone economies are in recession and more are expected to follow in coming months. The eurozone economy has struggled recently as the region’s debt crisis has knocked investor and consumer confidence and caused governments to introduce tough austerity measures.

Many believe that lower interest rates would help the eurozone economy pick up. A number of economists forecast another rate cut this year from the current record low of 0.75 per cent, however they do not expect it to be at next week’s meeting.

“We continue to see the ECB leaving policy rates unchanged at next week’s meeting – a view that is (at the margin) reinforced by this latest increase in inflation,” said James Ashley, an economist at RBC Capital Markets.

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