Euro-zone inflation 'under control'

Euro-zone inflation, excluding fast-rising energy prices, remain s firmly under control even though oil has pushed the headline rate to the highest level this year, official figures showed yesterday.

Eurostat reported that "core" inflation in July remained at the lowest levels since 2001, the latest evidence that oil prices are not pushing costs up in Europe.

But the European Union statistical unit confirmed its earlier forecast that the headline annual rate had risen to 2.2 per cent last month, from 2.1 per cent in June - with the increase attributable to higher energy costs.

The stability of core inflation is significant because it weakens the case for the European Central Bank (ECB) to increase interest rates, even though headline inflation continues to exceed its "price stability" target of a rate "below but close to" 2 per cent.

"August is likely to be another month when inflation is on the high side in terms of headline numbers, but there is no evidence that it is feeding through into other sectors," said Jacques Cailloux, economist at JP Morgan.

The ECB usually focuses on the headline rate, and the latest rise may persuade it to toughen its anti-inflation rhetoric after its next rate-setting meeting, on September 1st.

But Robert Prior-Wandesforde at HSBC added that Germany, the Netherlands and Finland all had core inflation rates below 1 percent. "One or more euro zone countries, including Germany, will move into deflation on a two-year view," he predicted.

Higher oil prices may even have pushed core inflation lower because of the effects that increased energy costs have in reducing consumer spending on other goods and services.

Eurostat said the annual rate of core inflation, excluding energy and unprocessed foods, was just 1.4 per cent in July.

Apart from a blip upwards in May to 1.6 per cent, core inflation has remained at 1.4 per cent since April, when it was at the lowest rate since February 2001. The ECB this month kept its main interest rate unchanged at 2 per cent for the 26th month running.