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High energy costs fuel inflation in euro zone

Brussels, September 29, 2012

Euro zone inflation accelerated in September as energy costs soared but core prices stayed low, likely leaving the European Central Bank (ECB) on track to cut interest rates soon.

Consumer prices in the 17 countries sharing the euro rose 2.7 per cent year-on-year, the European Union's statistics office Eurostat said yesterday in a first estimate that marked a rise from 2.6 per cent in August.

Markets had expected inflation to ease to 2.5 per cent.

Energy prices jumped 9.2 per cent after a 8.9 per cent rise the previous month. Core inflation, excluding both energy and unprocessed foods, fell to its lowest level in a year of 1.7pc in August, the latest month for which the data has been published.

Together with recent data indicating that the euro zone economy entered a recession in the third quarter, yesterday's inflation reading kept intact expectations that the ECB will not wait long before delivering a growth-boosting rate cut.

"It seems highly likely that the ECB will take interest rates down from 0.75pc to 0.50 per cent in the fourth quarter," said Howard Archer, economist at IHS Global Insight.

"While the ECB could act as soon as its October meeting next Thursday, we lean towards the view that they will probably hold off to November," he added.

Just 14 of 73 economists polled by Reuters this week expect the ECB to cut rates when it meets next Thursday but a majority expect the bank to have lopped off 25 basis points by the end of the year.

The ECB kept its main interest rate unchanged at a record low of 0.75 per cent at its meeting earlier this month.

Inflation fell steadily from 3 per cent in November 2011 to stabilise at 2.4 per cent in May, June and July, as the euro zone economy slowed sharply as a result of the sovereign debt crisis.

But it rose again for the first time in 11 months in August due to higher fuel and transport costs.-Reuters




Tags: inflation | Euro zone |

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