Euro zone inflation eases, Japan at decade high

Both Japan and the euro zone were heading for a sharp economic slowdown or even a recession, data indicated, while the US, which has already had a quarterly contraction at the end of last year, seemed to be the only one enjoying brisk growth.

The European Union’s statistics office, Eurostat, estimated consumer prices grew by 3.8% year-on-year this month, down from an all-time peak of 4.0% in July and a more pronounced slowdown than the 3.9% expected by markets. “This decline is solely due to the sharp fall in crude oil prices. If oil settles at its current level, inflation will drop to 2.5 by the end of the year,” said Christoph Weil, economist at Commerzbank.

In Japan, for the ninth month in a row, annual consumer inflation hit a decade-high of 2.4% in July due to high oil and food prices, depressing household spending. Japan’s industrial output rebounded in July but economists said it was likely a blip and not enough to ease recession fears for the world’s No.2 economy, with inflation rising and job offers at a four year low. But economists said the rising inflation in Japan would not trigger any rate hikes by the Japanese central bank because the slowing economy was a bigger concern.

US July inflation numbers, due at 1230 GMT, are likely to show a 0.3% monthly increase, the same as the month before. But Fed Chief Ben Bernanke made clear last week that the central bank was nowhere near ready to begin raising interest rates either.

In the euro zone, economic sentiment fell to 88.8 points this month from 89.5 points in July, well below economists’ expectations of a decline only to 89.1 points, driven mainly by falling confidence in industry and retail trade, despite better sentiment among consumers and in the services sector. “This represents the lowest reading since early 2003 and is consistent with stagnation in the economy and a genuine risk of recession,” said Ken Wattret, economist at BNP Paribas.

 
WHITHER RATES?

The euro zone data depressed the euro against the dollar and September Bund futures rose as it diminished chances of a European Central Bank rate rise despite the bank’s hawkish rhetoric triggered by an inflation rate nearly twice the ECB’s target. The European Commission survey of inflation expectations among consumers, which plunged to 22 points in August from 30 in July and below the long-term average of 23. Producer price expectations fell to 17 from 20 points. This is likely to please the ECB, which wants inflation to be just below 2% and raised interest rates by 25 basis points to 4.25% in July to better anchor inflation expectations amid soaring food and fuel prices.

ECB Governing Council member Klaus Liebscher said on Friday the bank would pay special attention “to keep inflation expectations in tune with the target of price stability”. With growth weakening sharply and oil prices, one of the main drivers of inflation, on the decline, economists expect the ECB’s next move is now more likely to be a cut than a rise. “This all supports our view that the ECB will eventually cut rates pretty aggressively, although worries over the inflation outlook will keep the bank on hold for some months yet,” said Jennifer McKeown, European economist at Capital Economics.

But ECB policymakers were keen earlier this week to douse speculation such a move could happen any time soon. ECB rate setters, notably Axel Weber, have said this week that talk about lower euro zone rates is premature. (Reuters)