Cheaper energy helped pull down euro zone prices at factory gates in August as expected, data showed today, pointing to easing inflationary pressures early in the pipeline as the ECB meets on interest rates.
Producer prices in the 15-country area fell 0.5 per cent month-on-month for an 8.5 per cent year-on-year gain, the EU statistics office said, in line with market expectations.
"The August producer price inflation reinforces belief that inflationary pressures in the euro zone have peaked," said Howard Archer, economist at Global Insight.
The monthly fall stemmed mainly from a 2.5 per cent drop in energy costs, after a 3.2 per cent monthly increase in July, when oil prices peaked at $147 a barrel. Oil was trading around $96.50 on Thursday morning.
Year-on-year, energy prices were 22.5 per cent higher, constituting the main factor behind the overall rise in the index. Without the impact of volatile energy and construction costs, industrial producer prices rose 0.2 per cent month-on-month and 4.3 per cent year-on-year.
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.
"Price trends are ... moving in a helpful direction as far as the ECB is concerned. The key question is whether they are sufficient for a significantly changed emphasis from (European Central Bank President Jean-Claude) Trichet today," said Steve Barrow, economist at Standard Bank.
"I would not have thought the price trends would have necessarily done that. The ECB through choice likes to leave rates where they are and bring rates down when they believe the back of inflation pressure has been broken, especially inflation expectations," he said.
The European Central Bank wants annual consumer price inflation in the euro zone to be just below 2 per cent. Inflation was 3.6 per cent in September, down from 3.8 per cent in August and 4.0 per cent in July.
Such consumer price growth could trigger higher wage demands, starting a wage-price spiral - something the ECB wants to avoid.
The bank raised interest rates in July by 25 basis points to 4.25 per cent to better anchor inflation expectations.
Inflation expectations among consumers and companies have fallen significantly since peaking in July, but remain high.