Rising cost of energy fuels inflation in euro zone

Euro-zone inflation continued to move beyond the European Central Bank's (ECB) targeted threshold of 2 per cent in October, as higher energy costs filtered through to consumer prices.

Eurostat data released yesterday show consumer price inflation in the 12-state currency zone climbed to 2.3 per cent last month, ahead of initial estimates. The rate has now been rising steadily for several months, and is at its highest point since April.

Mr Dermot O'Brien, chief economist with NCB, said the increase was unlikely to distract the ECB from considering a cut in euro-zone interest rates next month. Speculation has been growing recently that the bank could be set to take as much as half a point off the current 3.25 per cent rate in December to address sluggish euro-zone growth.

"The ECB has made up its mind," said Mr O'Brien, noting that the bank's governing council appeared to have become more sensitive to growth issues over the last month.

Mr O'Brien does not expect a cut next month to extend beyond 25 points; however he believes that a larger reduction could be justified.

Annual inflation in the Republic, at 4.4 per cent, remains the highest in the euro zone, according to yesterday's data.

A rate of 4.1 per cent was recorded in Portugal, while 4 per cent was recorded in Spain.

The lowest annual rate - 1.3 per cent - was observed in Belgium and Germany. Germany also recorded one of the biggest monthly falls in the indicator, with inflation declining from 2 per cent in September.

Mr O'Brien cautioned against over-reaction to the Irish rate, noting that it was driven primarily by service inflation, which had in turn been driven up by wage increases.

"There's a limited degree to which we should be getting steamed up about it," he said, adding that most Irish companies appeared to remain in sound economic shape.

On a monthly basis, average consumer prices in the euro zone rose by 0.3 per cent between September and October. In the Republic, the monthly increase was 0.4 per cent. German prices declined by 0.1 per cent.

A detailed breakdown of the annual figures shows that core inflation, which excludes volatile factors such as energy and food prices, was running at 2.4 per cent last month, the same rate as in September.

The highest rate of inflation in October was seen in hotels and restaurants, where prices were 4.6 per cent higher than one year previously. The lowest rate was recorded in the communications sector, where prices declined by 0.6 per cent.

Average annual inflation across the 15-member EU was 2.1 per cent in October, up from 1.9 per cent one month earlier.