Euro zone producer prices fall in October

Euro zone producer prices fell more than expected month-on-month in October, data showed today, underlining disinflationary trends…

Euro zone producer prices fell more than expected month-on-month in October, data showed today, underlining disinflationary trends in the recession-hit economy and the scope for a deep ECB rate cut.

A drop in the cost of energy and intermediate goods pulled down prices at factory gates in the 15-country area by 0.8 per cent against September for an annual rise of 6.3 per cent, the European Union's statistics office said.

Economists polled by Reuters had expected a 0.3 per cent monthly fall and a 7 per cent year-on-year gain. Eurostat also revised September's producer price move to a fall of 0.3 per cent on the month instead of the previously reported 0.2 per cent.

October's monthly fall stemmed mainly from a 2 per cent decline in the price of energy, of which the annual growth rate slowed to 15.8 per cent from 20.4 per cent in September.

Producer prices are an early indication of inflationary pressure because their increases, unless absorbed by retailers via lower profit margins, eventually translate into higher costs for consumers.

The European Central Bank aims for annual consumer price inflation in the euro zone of just below 2 per cent. Consumer inflation plunged to 2.1 per cent year-on-year in November, from 3.2 per cent in October.

The sharp deceleration in producer prices adds to arguments for a deep interest rate cut by the European Central Bank on Thursday. The bank slashed rates by 50 basis points in both October and November to the current level of 3.25 per cent.

The market consensus is that the bank will cut rates again by 50 basis points to 2.75 per cent, but many economists argue a reduction of 75 to 100 basis points would be better. Markets have fully priced in a 0.75 point cut.

Reuters