Fall in oil price triggers slide in European inflation

Friday, 29 August 2008, 07:00 Hrs
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Berlin:A slide in oil prices led the inflation rate in the 15-member eurozone to drop to 3.8 percent in August from 4.0 percent in July, data released Friday showed.

The fall raised the prospects that consumer prices might have peaked and as a result help ease pressure on the European Central Bank.

"That is a big decline" said Klaus Baader, Merrill Lynch's London-based chief European economist. "It is astonishing how rapidly the fall in oil prices has fed through to inflation."

Analysts had expected Friday's European Union's statistics office's preliminary inflation data to show consumer prices in the eurozone coming in at 3.9 percent this month.

This came after oil prices pulled back in recent weeks from record highs of around $150 a barrel to below $120.

However, further signs of the brittle mood currently prevailing in the eurozone also emerged Friday, with the European Commission's closely watched economic sentiment survey for the currency bloc falling more than expected to 88.8 points in August.

"The low level of the indicator suggests that industrial activity remains subdued," the commission said.

But the drop in oil prices and the release of national eurozone data showing inflation edging down in several eurozone states appears to have helped improve the mood among households, with the commission's consumer sentiment indicator rising for the first time in a year.

The ECB is expected to leave interest rates on hold at its meeting next week as it attempts to size up the economic fallout from shrinking growth and high inflation.

But inflation still remains at almost double the ECB's target of "close to, but just below two percent," with the build up to the release of the latest eurozone consumer price data accompanied by warnings from key members of the Frankfurt-based central bank of the threat posed by resurgent inflation.

In particular, some of the ECB's 21-member rate-setting council have expressed concerns about the risks of high inflation fuelling so-called second-round effects of rising prices triggering demands for higher wages.

Evidence of inflationary pressures emerging in the eurozone prompted the ECB to hike rates for the first time in more than a year in July, with the bank raising its refinancing rate by 25 basis points to 4.25 percent.

However, the problem for the ECB is that leading indicators are flashing red over the eurozone economy, with the credit crunch and slowing global growth having helped to push several economies such as Spain, Ireland and Italy to the brink of recession.
Source: IANS
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