Inflation soared unexpectedly across the debt-laden eurozone in September, the EU said yesterday, creating a dilemma for ECB chief Jean-Claude Trichet who chairs his final policy meeting next week.
After Brussels revealed a big leap to three per cent, from 2.5 per cent in August, analysts said the departing European Central Bank president faces a difficult call on whether to reduce interest rates to face weak economic times during Thursday’s Frankfurt talks.
“The much larger-than-expected jump in eurozone consumer price inflation to a 35-month high of three per cent in September reinforces suspicion that an ECB move as soon as next Thursday is unlikely,” said IHS Global Insight analyst Howard Archer.
Non-euro inflation is also running high. The Bank of England, expected to launch a new round of stimulus under “quantitative easing,” or printing money to bolster a slowing economy, has forecast five per cent across Britain for later this year.
London-based Archer believes the ECB, whose inflation target is carved in stone at “below or close” to two per cent, will cut interest rates from 1.50 per cent to 1.25 per cent before the end of the year.
However, he now reckons that Mr Trichet’s successor, Italy’s Mario Draghi, will be the one left with the tougher call eventually.
“One complication surrounding any ECB move in November is that it will be Mario Draghi’s first meeting as ECB president and he may be reluctant to see interest rates cut straight away in his tenure,” Mr Archer said.
He suggested that “Trichet could indicate that an ECB interest rate cut is very possible in November if economic data fail to pick up “which would put pressure on the Italian to act depending on wider developments.”
An increase in eurozone inflation was expected in line with Germany’s announcement of a spike to 2.8 per cent, but the size of the jump was still a surprise two weeks after the European Commission said inflation “seems to have peaked in the second quarter of 2011.”
In the EU executive’s autumn forecast, economic affairs commissioner Olli Rehn presented findings tipping “2.5 per cent for the year as a whole, and remaining above two per cent until the end of 2011.”
Paris-based Clemente De Lucia of BNP Paribas focused on the devil in the detail, which he said suggested a “benign” pattern ahead.
He said that available data at the national level, ahead of the release of detailed eurozone analysis by Eurostat in mid-October, did show inflation pushing up in the biggest euro eco-nomies.
He highlighted a significant rise in Italy, partly due to changes in statistical methods, and also a “sharp rebound” in Germany for core clothing prices.
Nevertheless, he also maintained that “the medium-term inflation profile is rather benign.”
He explained: “The downturn in the international environment has eased commodity prices, which are now expected to be lower than previously expected.
“Consequently, we should see an easing of energy price inflation, the largest contributor to headline inflation in past months.”
Mr De Lucia tipped a headline rate of 2.8 per cent in the eurozone for this year as a whole before easing back to the ECB’s target level next year.
Meanwhile the rate of eurozone unemployment was steady at 10 per cent in August, official figures showed yesterday, but the actual numbers of people out of work fell across the single currency area.
Eurostat, the European Union’s statistics agency, said seasonally-adjusted unemployment across the 17 nations sharing the euro remained at 10 per cent, for a fourth month running.
Eurostat estimated that just over 15.7 million people were looking for jobs in the eurozone in August, down 38,000 from the previous month.
In the wider 27-nation EU, which includes non-euro members Britain and Poland, the unemployment rate was also steady at 9.5 per cent.
Nearly 22.8 million people were unemployed across the EU, 62,000 less than in July.