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Euro zone PPI up but inflation pressure seen weak

BRUSSELS - Energy costs boosted the euro zone producer price index by more than expected in October versus the previous month but excluding energy, prices fell, indicating inflationary pressures remain weak.

Producer prices in the 16-country area rose 0.2 percent against September and were down 6.7 percent year-on-year, European Union statistics office Eurostat said on Wednesday.

Economists polled by Reuters had on average expected unchanged prices in monthly terms and a fall of 6.8 percent year-on-year.

Without volatile energy and construction, producer prices fell 0.1 percent on the month and 3.9 percent year-on-year.

“October’s euro zone producer price figures confirm that pipeline price pressures in the industrial sector remain weak,” said Ben May, economist at Capital Economics.

“This supports the view that the recent rise in CPI (consumer price) inflation is not the start of a sustained upward trend,” he said.

Consumer prices rose 0.6 percent year-on-year in November following five months of decline, and economists expect consumer inflation to stabilise around 1 percent in coming months.

The Eurostat data showed energy costs rose 1.0 percent month-on-month while prices of intermediate and non-durable consumer goods fell 0.1 percent and 0.3 percent respectively.

Durable consumer goods and capital goods remained unchanged month-on-month. “Consumer goods inflation, which tends to lead core CPI inflation by around a year, inched down and suggests that the latter is set to fall considerably further,” May said. Producer prices are important to the European Central Bank because they show inflationary pressure, or the reverse, early in the pipeline. The ECB, which wants annual consumer inflation to be just below 2 percent, meets on interest rates on Thursday.

“There remains a compelling case for the ECB to only very gradually withdraw its emergency liquidity measures, and to keep interest rates down at 1.00 percent until deep into 2010,” said Howard Archer, economist at IHS Global Insight.