Falling energy costs and sluggish industry pulled down producer prices in the euro zone in August, data showed today, although the 0.1 per cent dip is probably not enough to persuade the European Central Bank to cut rates this week.
Stripping out energy, producer prices in August against July rose just 0.1 per cent for the third month running after peaking in March, the European Union's statistics office Eurostat said.
Economists say the risks to inflation are ebbing despite a surprise 3 percent jump in consumer prices in September, which was partly driven by Italian tax hikes aimed at convincing markets the euro zone's number three economy can service its debts.
"We continue to expect euro area inflation to start moderating from November onwards," said Fabio Fois at Barclays Capital, adding that falling energy prices will pay a big role in that trend as Europe's economy weakens further.
Energy prices fell 0.7 per cent in August compared to July, following a 1.5 per cent jump in July versus June, Eurostat said.
Brent oil rose above $115 a barrel in July but has since slipped as investors worry whether Europe can solve its debt crisis and if it has the potential to unleash a global recession. Brent futures slipped below $101 today and investment bank Goldman Sachs cut its 2012 Brent crude forecast to $120 a barrel from $130 a barrel.
Falling prices at factory gates also signal that more and more managers are feeling Europe's manufacturing slowdown and are cautious about passing on higher costs to consumers.
"We cannot deny that the entire euro zone is facing an economic slowdown and we need to be capable of stimulating demand," Spain's economy minister Elena Salgado told reporters at a meeting of European finance ministers in Luxembourg before the data was released.
Although prices in August at factory gates slipped by less than the 0.2 per cent forecast by economists in a
poll, on an annual basis, producer prices are down from a 6.8 per cent peak in April to a 5.9 per cent rise in August.
An ECB interest rate cut could still come by the end of the year to support the weak economy, however.
The ECB changed its tone at its last policy meeting in early September and opened the door to cuts, signalling that it had halted a cycle of interest rate rises begun five months ago.
Outgoing ECB president Jean-Claude Trichet said then that there were "intensified downside risks" for the euro zone's economy and the bank expects inflation to be below 2 per cent in 2012.
Reuters