Instant View: Euro zone consumer inflation steady at +2.6 percent in September


Euro zone inflation was unchanged in September from a month earlier and the reading might have been lower were it not for a double-digit jump in clothing prices ahead of Europe's winter.

Consumer prices in the 17 countries sharing the euro rose 2.6 percent in September on an annual basis -- the same level as August, Eurostat said on Tuesday, lower than the 2.7 percent rise economists polled by Reuters had forecast.

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"Eurostat core inflation came with barely any surprise, remaining stable at 1.5 percent, when we were looking for a slight drop and had actually highlighted upside risk to our forecast.

"That shows the impact of Spanish VAT hikes in September, so all in all it is not really a great surprise today, but although the headline rate is quite high at 2.6 percent, one has to notice that the core inflation rate is at 1.5 percent and our sense for the remainder of the year is for a downward trend, both in the headline and the core inflation rate.

"We are looking for the headline inflation rate to go down to 2.3 percent and the core at around 1.3 percent at the end of the year.

"In terms of inflation pressures and monetary policy-wise, headline inflation will remain above the ECB's target, but the core will be below that, and that is what the ECB is probably more looking at when deciding on medium term inflation pressures.

"In our view the headline HICP inflation rate will reach the ECB threshold by the middle of next year, so the ECB's low interest rate policy is not jeopardized by today's reading.

"The ECB has very little room to move on rates, and we expect them to move to 0.5 percent by the end of the year, but the ECB has said rates are not a key concern at the moment and were not discussed at the last meeting so the focus should rather keep being on improving monetary policy transmission mechanisms."


"Significantly, euro zone inflation was pushed up in September by higher energy prices and a VAT rise in Spain. Energy prices rose 1.1 percent month-on-month in September which pushed the year-on-year increase up to 9.1 percent from 8.9 percent in August and a low of 6.1 percent in July, while the VAT increase caused Spanish inflation to spike to 3.5 percent in September from 2.7 percent in August.

"The underlying inflation situation still looked pretty benign. Indeed, core euro zone consumer price inflation (which excludes energy and unprocessed foods) actually retreated to a 13-month low of 1.6 percent in September from 1.7 percent in August and 1.9 percent in July.

"Admittedly the overall marked rise in oil prices from their June lows and the prospect of higher food prices due to grain prices being pushed up by poor harvests (notably in the United States) means that euro zone consumer price inflation is likely to be higher than had been hoped for in the near term at least, but underlying price pressures should continue to be limited by generally muted economic activity, excess capacity and ongoing wage moderation amid high and rising unemployment.

"Although consumers' inflation price expectations have moved back up recently, this is unlikely to result in higher wages due to the substantial slack in most labor markets. And the latest European Commission survey indicated that companies' pricing intentions remain muted compared to long-term norms, despite rising in September.

"With the underlying inflation situation in the euro zone still looking far from alarming and with the euro zone almost certainly having suffered further GDP contraction in the third quarter and still facing a troubling outlook, we maintain the view that it is a question of when - rather than if - the ECB will take interest rates down from 0.75 percent to 0.50 percent.

"We have penciled an interest rate cut to 0.50 percent in December on the assumption that continuing weak economic data and surveys will gradually convince the ECB that lower interest rates are warranted. However, the ECB could delay trimming interest rates until early 2013 due to concerns that the impact of a near-term cut could be diluted by the problems in monetary policy transmission channels."


"Euro zone inflation held steady at 2.6 percent in September according to Eurostat, coming in slightly below the consensus and the earlier 'flash' estimate. A further uptick in energy and food price inflation was offset by a decline in alcohol and tobacco price inflation. The core rate was unchanged at 1.5 percent despite a sharp increase in VAT in Spain, but this was mainly due to favorable base effects (core inflation increased sharply in September last year, which was related to changes in the treatment of seasonal products).

"Looking ahead, euro zone inflation should start to move lower before long as previous sharp increases in energy and food prices cease to boost the annual rate. But with commodity prices remaining high and volatile, and further VAT hikes in the pipeline (e.g. in the Netherlands next month and in Finland in January), it is probably going to be a very gradual descent.

"Indeed, headline inflation may remain above 2 percent well into next year. Even so, medium-term inflation pressures remain subdued. This gives the ECB leeway to further lower interest rates to try to help revive the economy. We still anticipate a 25 basis point cut in the refi rate to 0.5 percent around the turn of the year."

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(Reporting By Robin Emmott and Jan Strupczewski; editing by Rex Merrifield)