Consumer prices rose 1.7% from a year earlier, below the 2.3% gain in August and the 1.8% estimate of September 29, the European Union’s statistics office in Luxembourg said today. September prices were unchanged from the prior month. While the inflation rate dropped below the ECB’s 2% limit for the first time since January 2005, the decline may not be enough to pacify central-bank policy makers, who have indicated they will raise interest rates again before the year ends. The economy is expanding at the fastest pace in six years and money-supply growth also remains elevated, threatening to fan inflation. „Inflation is expected to go lower before pushing up again, but growth above trend and strong monetary data point to further rate rises,” said David Owen, an economist at Dresdner Kleinwort in London. Energy prices rose 1.5% in September from a year earlier, the weakest advance since May’s 1.3% gain. Crude oil has fallen 22% from a record $78.40 a barrel on July 14 to $60.15 today, reducing costs for companies and leaving consumers with more cash to spend. Prices for housing, alcohol and transport all gained at a slower rate in September than August. In a separate report, the ZEW Center for European Economic Research in Mannheim, Germany, said today that investor confidence in Germany, the euro region’s largest economy, fell to the lowest in more than 13 years in October as a planned tax increase and higher interest rates dimmed the outlook.

The yield on the benchmark two-year German government bond, among the securities most sensitive to changes in rates, dropped as low as 3.64% after the report, compared with 3.65% before its release. The euro was little changed at $1.2538. Excluding volatile energy, food and tobacco prices, the so-called core rate of inflation was 1.5% in September, higher than the 1.4% in August and the most since April. Price increases accelerated for clothing, health and education. That may keep pressure on the ECB to continue tightening credit after the central bank raised its key rate five times since early December, boosting it most recently by a quarter point on October 5 to 3.25%, up from a six-decade low of 2% a year ago. ECB President Jean-Claude Trichet has repeatedly said the central bank is ready to increase rates further if its forecasts for economic growth and inflation are confirmed. It expects inflation of 2.4% this year and next on the assumption that oil prices stay around $70 a barrel.

„Risks to price stability are clearly on the upside,” Trichet told a European Parliament committee in Brussels October 10. The bank is also anticipating economic growth of 2.5% this year in the euro area, almost double the pace of last year. At the same time, unemployment of 7.9% in August is close to the five-year low of 7.8% the previous month and M3, the ECB’s preferred measure of money supply, rose at an 8.2% rate in August, up from 7.8% in July. Industrial production gained 1.8% in August from July, when it fell 0.4%, the statistics office said today. Investors are increasingly anticipating rates will rise further in 2007, futures trading suggests. The yield on the three-month Euribor futures contract for September 2007 traded at 3.84% today, up from 3.77% at the start of the month. The contract settles to the three-month inter-bank offered rate for the euro, which has averaged about 16 basis points more than the ECB’s key rate since the currency’s start in 1999. (Bloomberg)