Euro-zone inflation dropped unexpectedly in August, but the European Central Bank is still expected to express fears about soaring oil prices after its interest-rate setting meeting today.
The annual inflation rate in the 12-country region was 2.1 per cent in August, down from 2.2 per cent in July, according to a "flash" estimate yesterday by Eurostat, the European Union's statistical unit. That suggested higher energy costs had put downward pressure on other prices, economists said.
The ECB is expected to leave its main interest rate unchanged today at 2.0 per cent for the 27th month running and ignore rumbling political pressure for a cut.
Eurostat gave no detailed breakdown but economists said "core" inflation, excluding energy costs, remained modest, with sluggish demand forcing widespread price-cutting, especially in areas such as clothing. "If an economy is fundamentally weak, and you get a shock like an oil price rise, you get further pressure to discount," said James Carrick, at ABN Amro.
However, oil prices are expected to keep upward pressure on inflation for the rest of the year. That adds to the ECB's dilemma: it is expected to revise upwards its inflation forecasts today, but weak growth makes a rate increase hard to justify. Inflation may not fall within its definition of price stability - a rate "below but close" to 2 per cent - for the rest of the year.
The weakness of euro-zone consumer spending was reflected in separate Eurostat figures showing a 0.1 per cent fall in private consumption in the three months to June. Overall, GDP growth in the quarter was left unrevised at 0.3 per cent.
Meanwhile, in Germany, retail sales in July fell 0.6 per cent compared with the previous month.
Accelerating euro-zone money supply figures have been sounding alarm bells.
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