Tags: Oil | Eurozone | Prices | inflation | Slowing

Oil Boosts Eurozone Prices but Inflation Seen Slowing

Monday, 16 Aug 2010 10:16 AM

Oil drove eurozone inflation to a 20-month high in July and core inflation inched up, but price rises are likely to slow in the second half of the year as budget cutbacks weaken economic recovery.

Consumer prices in the 16 countries using the euro dipped 0.3 percent month-on-month in July but still rose 1.7 percent in annual terms, the European Union's statistics office Eurostat said on Monday.

The annual figure was the same as earlier estimated by Eurostat and in line with market expectations, although economists had forecast a deeper month-on-month decline in the index of 0.4 percent.

The European Central Bank wants to keep inflation at just below 2 percent over the medium term and the figures, including a 1.2 percent number in Germany, showed little threat to expectations it can keep interest rates steady well into next year.

But of bigger concern may eventually be how prices will fare in harder-hit economies like Spain and Greece, where tax changes are masking the disinflationary impact of a collapse in growth and domestic demand.

"With plenty of spare capacity still in the economy and fiscal austerity measures likely to ensure only a modest recovery in the region as a whole, core and headline inflation will soon begin to drift downwards again," said Ben May, economist at Capital Economics.

The eurozone economy grew at its fastest rate in more than three years in the second quarter at 1.0 percent quarter-on-quarter thanks to a surge in German gross domestic product combined with a solid if less impressive rise in France.

This was well above second-quarter growth in the United States, which is showing signs of flagging at 0.6 percent while economic expansion in Japan slowed to a crawl of 0.1 percent in the same period, adding to long-term problems with deflation.

Without the volatile energy and unprocessed food prices — a measure that the ECB calls core inflation — the monthly decline of prices was 0.5 percent for a 1.0 percent annual rise -- as expected by economists polled by Reuters.

Energy prices were flat month-on-month in July but 8.1 percent higher year-on-year. Prices of clothes fell 9.7 percent against June and only rose 0.7 percent on a year earlier.

Economists said the higher core inflation primarily reflected the impact of Value Added Tax increases in Spain, Portugal, Greece, and Finland, which are trying to reduce budget deficits to put public finances on a sustainable path.

"With underlying inflationary pressures continuing to be held down by the still-substantial margin of spare capacity in the economy — despite the 1 percent quarter-on-quarter surge in Q2, eurozone real GDP remains nearly 4 percent below its first-quarter 2008 peak — we believe there is little reason for the ECB to consider a rate hike anytime soon," said Martin van Vliet, economist at ING.

"Indeed, with inflationary pressures beneath the surface remaining muted, ECB rate hikes should be a story for later next year," he said.

In the eurozone's biggest economy Germany, where the economy grew by at the fastest rate since reunification in the second quarter, July inflation was only 0.3 percent month on month and 1.2 percent year-on-year.

In France, prices fell 0.3 percent month-on-month in July for a 1.9 percent annual increase.

But in Greece, which saw a deepening of economic recession in the April-June period, prices were still 5.5 percent higher in July than a year earlier. Spain, where the economy expanded only 0.2 percent in the second quarter, saw prices grow 1.9 percent year-on-year.

© 2017 Thomson/Reuters. All rights reserved.

   
1Like our page
2Share
Headline
Oil drove eurozone inflation to a 20-month high in July and core inflation inched up, but price rises are likely to slow in the second half of the year as budget cutbacks weaken economic recovery. Consumer prices in the 16 countries using the euro dipped 0.3 percent...
Oil,Eurozone,Prices,inflation,Slowing
579
2010-16-16
Monday, 16 Aug 2010 10:16 AM
Newsmax Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved