European inflation unexpectedly accelerated to the fastest in almost three years in September, complicating the European Central Bank’s task as it fights the region’s worsening sovereign-debt crisis.
The euro-area inflation rate jumped to 3 percent this month from 2.5 percent in August, the European Union’s statistics office in Luxembourg said today in an initial estimate. That’s the biggest annual increase in consumer prices since October 2008. Economists had projected inflation to hold at 2.5 percent, according to the median of 38 estimates in a Bloomberg survey.
Faster inflation increases pressure on an economy already hurt by tougher austerity measures and waning investor confidence as governments combat the fiscal crisis. European economic confidence slumped more than economists forecast in September, partly as households grew more pessimistic. Commerzbank AG said today that the region “looks set to slip into a recession.”
“It’s more of a technical thing than a fundamental change,” said Laurent Bilke, global head of inflation strategy at Nomura International Plc in London, which was the only bank to forecast the right inflation rate in the Bloomberg survey. “The ECB is not going to cut in October and obviously strong inflation doesn’t give them much room for maneuver on that side. They will probably need a few more months of negative economic news to get there, maybe in November or December.”
Economic Growth
The euro moved lower against the dollar after the inflation data, trading at $1.3521 at 11:52 a.m. in Brussels, down 0.6 percent on the day.
The ECB, which aims to keep annual gains in consumer prices just below 2 percent, said earlier this month that inflation may average 2.6 percent this year and 1.7 percent in 2012. Economic growth may weaken to 1.3 percent next year from 1.6 percent in 2011, it said. By comparison, the International Monetary Fund sees the euro-area economy expanding 1.6 percent and 1.1 percent this year and next.
ECB officials have indicated the central bank is more likely to take non-standard measures first before resorting to rate cuts. Council members Ewald Nowotny and Luc Coene signaled the ECB may offer banks unlimited liquidity for as long as a year, while a euro-area central banking official speaking on condition of anonymity said policy makers will also debate restarting their covered-bond purchases.
Inflation ‘Bombshell’
“We suspect the ECB may be reluctant to cut interest rates in the near term,” said Martin van Vliet, an economist at ING Groep NV (INGA) in Amsterdam, calling today’s report a “bombshell.” The central bank “may instead opt to take steps to improve market functioning.”
The euro-area unemployment rate held at 10 percent in August, a separate report showed today. About 15.74 million people were unemployed in August in the euro region, down 38,000 from the previous month. At 21.2 percent, Spain had the highest jobless rate among the euro countries. Austria and the Netherlands had the lowest rates, with 3.7 percent and 4.4 percent, respectively.
With companies reluctant to boost hiring and increasing price pressures eroding their purchasing power, consumers may keep spending plans on hold. European economic confidence dropped to the lowest in almost two years this month and services output contracted.
‘Clearly Above’
ECB President Jean-Claude Trichet, who will retire at the end of October, said on Sept. 8 that inflation rates are “likely to stay clearly above” 2 percent in the coming months before falling below the central bank’s ceiling in 2012. This assessment is based on “moderate economic growth,” he said. Trichet will be succeeded by Italy’s Mario Draghi.
While the economy is showing increasing signs of slowdown, ECB council members have signaled little willingness to lower borrowing costs. Luxembourg’s Yves Mersch called speculation about a 50 basis-point rate cut “wild expectations,” according to Market News International. Jozef Makuch from Slovakia said on Sept. 27 that he “personally” doesn’t expect a recession.
“Next year, inflationary pressures are projected to abate,” ECB council member Erkki Liikanen said in a speech posted on the Bank of Finland’s website on Sept. 27. “Ultimately, it’s the responsibility of monetary policy to ensure that this moderation will take place.”
The statistics office will release a breakdown of September consumer prices next month. Euro-region core inflation, which excludes volatile costs such as energy, held at 1.2 percent in August from the previous month.
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