Euro-Area Inflation Unexpectedly Accelerates on Spain: Economy

Euro-Region Inflation Unexpectedly Accelerated in September
A customer uses a fuel pump to fill his vehicle with unleaded petrol at an Esso gas station in Munich. Photographer: Michael Nagle/Bloomberg

Euro-area inflation unexpectedly accelerated in September after the Spanish government increased sales tax to help plug its budget gap, driving prices up the most in 17 months. Consumer prices in the 17-nation euro region increased 2.7 percent from a year earlier after a 2.6 percent gain in August, the European Union’s statistics office in Luxembourg said in a flash estimate today. The median forecast of 40 economists in a Bloomberg News survey was for the rate to fall to 2.4 percent.

Spain raised the main rate of value-added tax to 21 percent from 18 percent on Sept. 1, spurring its inflation rate to 3.5 percent, even as the country endured the highest unemployment rate in the EU. Italian inflation also unexpectedly quickened on higher energy prices and the end of post-summer retail discounts. Energy costs rose 9.2 percent in the euro area in September.

“Higher energy prices have had a marginal effect on inflation in September, but we expect most of the upward surprise to be explained by one-off factors” in so-called peripheral euro-area countries, Annalisa Piazza, a fixed-income analyst at Newedge Group in London, wrote in a note to clients.

Inflation has stayed above the European Central Bank’s target of slightly less than 2 percent for almost two years even as the economy has faltered. ECB Governing Council member Ewald Nowotny and Executive Board member Benoit Coeure have suggested the Frankfurt-based central bank probably won’t lower interest rates at its next meeting on Oct. 4.

Scope for Easing

“Underlying inflation pressures remain muted in most parts of the euro-zone economy,” said Martin van Vliet, an economist at ING Bank in Amsterdam. “This gives the ECB scope to ease monetary policy further.”

“Although the ECB looks set to keep interest rates hold next week -- the hawks on the Governing Council will probably use the increase in inflation as ammunition to argue against further interest rate action -- there is still a decent chance it will cut rates once more before the end of this year,” Van Vliet said.

The cost of non-energy industrial goods and services rose 0.8 percent and 2 percent in September, respectively, today’s report showed. Prices of food, alcohol and tobacco increased 2.9 percent after a 3 percent gain in August.

The economic gloom extended to Asia, where Japanese and South Korean industrial production fell more than economists estimated last month as slowdowns in China and Europe weighed on exports, building the case for more monetary easing.

U.S. Consumer Spending

Japan’s output fell 1.3 percent from July, the biggest decline in three months, a Trade Ministry report showed in Tokyo today. South Korean production slid 0.7 percent, partly on a strike at Hyundai Motor Co.

In the U.S., consumer spending probably stagnated in August after adjusting for inflation, showing the U.S. economic expansion is struggling to gain momentum, economists said before a report today.

Household purchases rose 0.5 percent after increasing 0.4 percent in July, according to the median estimate of 77 economists surveyed by Bloomberg. The report may also show the gain reflected a 0.5 percent jump in prices, the biggest since June 2009.

ECB President Mario Draghi on Sept. 6 unveiled details of an unlimited bond-purchase program, dubbed Outright Monetary Transactions, designed to regain control of interest rates in the euro area and fight speculation of a currency breakup.

ECB Forecast

Data yesterday showed economic confidence in the euro area unexpectedly fell in September as leaders strived to rein in the debt crisis in the single-currency bloc and the economy’s slump deepened.

The ECB has cut its forecast for economic growth and raised its forecast for inflation. In 2013, the economy will expand 0.5 percent rather than the 1 percent forecast in June. At the same time, the ECB raised its projection for inflation next year to 1.9 percent from 1.6 percent.

Draghi said this month that “owing to high energy prices and increases in indirect taxes in some euro-area countries, inflation rates are expected to remain above 2 percent throughout 2012.” Over the medium term, the outlook for inflation was “broadly balanced,” he said.

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