Eurozone inflation pulls back from record high

August 29, 2008

, BRUSSELS, August 29  – Inflation in the 15 countries sharing the euro pulled back in August from a record high, offering an increasingly rare ray of light as the threat of recession looms, official EU data showed on Friday.

Annual inflation in the euro countries fell to 3.8 percent from a record 4.0 percent in July amid cooling oil prices, according to a first estimate from the Eurostat data agency.

The rate was slightly lower than economists\’ expectations for inflation to fall to only 3.9 percent, as polled by Dow Jones Newswires.

With oil trading at record highs close to 150 dollars a barrel, annual consumer price inflation in the eurozone had reached in July the highest level since the euro was formed in 1999.

However, since then, oil prices have gradually declined, standing at about 117 dollars a barrel in morning trading in London on Friday, raising hopes that inflation may have passed its peak.

"We are confident that the peak in euro-area inflation took place in June-July at 4.0 percent," Lehman Brothers economist Laurent Bilke said.

The fall in inflation will bring welcome relief to consumers and businesses alike as both struggle with fast deteriorating economic conditions.

Driven by soaring oil and food prices, high inflation has pinched consumers\’ purchasing power and businesses\’ margins, putting additional strain on them just as they tried to cope with a weaker economy.

Separately, a European Commission survey found that confidence in the eurozone economy fell in August to the lowest level in over five years, although consumers\’ outlook improved marginally.

Following in the path of other recent weak data, the European Commission\’s eurozone economic sentiment indicator eased in August to 88.8 points from 89.5 points in July.

Eurostat said in mid August that the eurozone economy contracted for the first time since the bloc was formed in the second quarter, with output falling 0.2 percent.

The decline raised the prospect that the eurozone is sliding into recession, which is defined as two consecutive quarters of contracting activity.

Despite slowing economic activity, the European Central Bank raised its main lending rate in July by a quarter of a percentage point to 4.25 percent, eager to keep a lid on inflation.

Economists said that if inflation keeps falling then the ECB, which strives to keep annual eurozone inflation at or close to 2.0 percent, would eventually become more inclined to cut interest rates in order to give the economy a boost although not until at least next year.

"With activity remaining subdued in the first half (of 2008) and into 2009, and inflation continuing its decline, the case for ECB rate easing will become more forceful," said UBS economist Sunil Kapadia.

"We continue to expect the ECB to ease policy by 75 basis points next year, starting in the first quarter," he added.

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