Euro zone inflation held at 3.0 per cent for a second month in October, with economists saying it had likely peaked and would soon fall in a struggling economy, giving the European Central Bank room to cut interest rates and focus on growth.
Now at a three-year high, consumer prices in the 17-nation currency area rose 0.3 per cent in October alone, the European Union's statistics office Eurostat said today.
Inflation stayed above the ECB's target of close to, but under 2 per cent, pushed up by higher oil, clothing and food prices.
Many economists say a worsening business climate, crippled by the euro zone sovereign debt crisis, means consumer prices won't go higher.
"October should be the peak, so we see inflation coming down in November, but only moderately, to 2.9 per cent," said Marco Valli, chief euro zone economist at Unicredit. "If I had to say, I would expect an ECB rate cut in January, but it is an extremely close call."
With price pressures easing, many economists expect new ECB President Mario Draghi to repeat this month's 25-basis point interest rate cut to 1.25 per cent again soon to boost a euro zone economy that stands on the brink of recession after barely growing in the third quarter.
European Commission president Jose Manuel Barroso warned today that the region's growth would be low at best, while unemployment would remain at about 10 percent for the next two years.
"If you look at the fact that the ECB cut rates in November, I think it does not mean that they will stop cutting in December," said Carsten Brzeski at ING. "I think their main focus is on growth these days and not on headline inflation."
With Brent crude at over $110 a barrel, supported by growing supply concerns and tensions over Iran's nuclear programme, energy costs remain high in Europe, fuelling concerns about possible stagflation.
But many economists expect oil price rises to abate by early next year, and excluding energy, consumer inflation in the euro zone was 2.0 per cent in October, in line with the ECB's goal.
That could take overall inflation down to below 2 per cent in the first half of next year, according to IHS Global Insight.
Still, the ECB's call is not an easy one. Energy prices may stay high until March and even if the bank cuts rates to 1 per cent in the next few months, it may not be prepared to go further. Even at the height of the 2008/2009 crisis, the biggest downturn since the 1930s, the ECB did not go below that level.
High energy costs were evident in the Eurostat data, with transport price inflation reaching 5.8 per cent in October, the highest in the euro area index, followed by alcohol and tobacco at 4.4 per cent on an annual basis.
The price of clothing rose 2.3 per cent in October compared to a year ago, partly due to a change in which Eurostat measures the data, and food prices jumped 3.1 per cent.
On a country-by-country basis, consumer prices rose 3.4 per cent in Belgium and 3.0 per cent in Spain in October. Price inflation was 2.5 per cent in France and 3.8 per cent in Italy, where the government raised value added taxes to convince markets it can service its debts.
Reuters
