European Inflation Drops Below ECB's 2% Limit; Confidence Rises

First Published:	29/09/2006 12:58:52
Inflation in the dozen nations sharing the euro slowed to below the European Central Bank's 2 percent limit in September for the first time since January 2005 as oil prices fell from a record. Consumer prices rose 1.8 percent from a year earlier, the slowest increase since March 2004, after gaining 2.3 percent in August, Eurostat, the European Union's statistics office in Luxembourg, said today. A measure of Europeans' confidence in the economy unexpectedly rose, the European Commission said. The decline in September's inflation rate may not be enough to ease concern about price pressures among policy makers at the European Central Bank, who are preparing the ground for another rate increase at their next meeting on Oct. 5. Money-supply growth, which the ECB uses as a gauge of future inflation, unexpectedly accelerated in August. ``The slowdown in September headline inflation is welcome news to the ECB, but it is unlikely to do much to deter them from continuing its current mission of normalizing interest rates,'' said Martin Van Vliet, an economist at ING Bank NV in Amsterdam. ``They still have concerns for the potential for underlying inflation to rise.'' The inflation figure was lower than the 1.9 percent median forecast of 39 economists surveyed by Bloomberg News. Oil Decline Crude oil has fallen 20 percent from a record $78.40 a barrel on July 14, reducing costs for companies and leaving consumers with more cash to spend. The inflation rate in Germany, Europe's largest economy, dropped to the lowest level in more than two years in September. ECB council member Axel Weber said this week that it is too early to be sure lower oil prices will curb inflationary pressure in the euro region. ``From the current perspective I think it's premature to assume a sustained easing of the risks to inflation,'' Weber said in a speech in Baden-Baden, Germany. ``The withdrawal of the level of monetary expansion remains warranted.'' The ECB forecasts inflation of 2.4 percent this year and next on the assumption that oil prices stay around $70 a barrel. M3, the ECB's preferred measure of money supply, rose at an 8.2 percent rate in August, up from 7.8 percent in July. The jobless rate was unchanged at 7.8 percent in July, the lowest since the single currency's introduction. The Frankfurt-based bank has raised its benchmark interest rate four times to 3 percent since early December from a six- decade low of 2 percent, as it seeks to counter inflation. ECB President Jean-Claude Trichet on Sept. 16 reiterated his inflation-fighting call for ``strong vigilance,'' a word used to flag previous rate increases. `Breathing Space' ``The decline in inflation won't do anything to the ECB's short-term thinking,'' said Stephen Webster, chief European economist at 4Cast Ltd. in London. It may ``give them a breathing space before the value-added tax increase we're going to get in Germany in January,'' he said, referring to a planned 3 percentage-point increase in a sales tax to 19 percent. The commission's gauge of sentiment among executives and consumers rose to 109.3 in September from 108.3 in August. Economists had forecast a decline to 106.3 from an initial August reading of 106.7, according to the median forecast of 30 economists surveyed. The ECB has forecast that euro-area expansion will cool to about 2.1 percent in 2007 from 2.5 percent this year as a slowdown in the U.S. damps export demand and the tax increase in Germany crimps consumer spending. Investors, who expect two more rate increases this year, have reined in their forecasts for further moves in 2007, futures trading suggests. The yield on the three-month Euribor futures contract for September 2007 traded at 3.71 percent today, down from 3.87 two weeks ago.
Source:  Bloomberg http://www.bloomberg.com

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