Euro-region inflation unexpectedly slowed in July, though it remained above the European Central Bank's 2 per cent ceiling for an eighth month as rising energy prices added pressure on companies to pass on higher costs.

The inflation rate in the 17-country euro region declined to 2.5 per cent from 2.7 per cent in the previous month, the European Union's statistics office in Luxembourg said today in an initial estimate. Economists expected price growth to hold steady, the median of 31 forecasts in a Bloomberg News survey showed.

A 6 per cent gain in crude oil costs this year is sapping consumers' purchasing power and pushing companies to raise prices to protect earnings just as the recovery falters. European Central Bank president Jean-Claude Trichet on July 7th signalled concern that price pressures may feed into wage demands and spark more persistent inflation after increasing borrowing costs a second time this year.

"The slowdown of inflation at the euro-area level is mostly related to very weak Italian numbers," said Marco Valli, chief economist for the single-currency region at Unicredit Global Research in Milan. "It's a technical issue. We will see a rebound of inflation in August and September."

Italian inflation, calculated using a harmonised European Union method, slowed to 2.1 per cent in July from 3 per cent in June as consumer prices dropped 1.7 per cent in the month, Rome- based national statistics office, Istat, said in a preliminary report today. On a non-harmonised basis, Italian inflation held at 2.7 per cent.

By contrast, inflation in Germany unexpectedly quickened in July to 2.6 per cent from 2.4 per cent in June.

The threat of higher energy prices will contribute to a decline in consumer confidence in Europe's largest economy in August, market research company GfK said this week.

The ECB last month forecast euro-region inflation to average 2.6 per cent this year and 1.7 per cent in 2012.

Mr Trichet said earlier this month that euro-region inflation will probably stay "clearly above" 2 per cent over the coming months, calling risks to the outlook "on the upside". Euro-region growth probably slowed in the second quarter from 0.8 per cent in the previous three months, he said.

With the region's recovery losing momentum as governments step up spending cuts to plug budget gaps, companies may find it harder to raise prices. Euro-region producer-price inflation slowed
to 6.2 per cent in May from 6.7 per cent.

Euro-region core inflation, which excludes volatile costs such as energy, quickened to 1.6 per cent in June from 1.5 per cent in the previous month.

Bloomberg