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Euro zone returns to inflation in Nov

Source: Reuters - Mon 30th Nov 2009

The euro zone returned to inflation in November, data showed on Monday, as more expensive oil boosted consumer prices by more than expected after five straight months of falls.

Consumer prices in the 16-country area rose 0.6 percent year-on-year after a 0.1 percent decline in October, the European Union statistics office said in a preliminary estimate.

Economists polled by Reuters had on average expected a 0.4 percent increase.

A detailed breakdown and monthly data will be available on Dec 16.

"While inflation was higher than expected in November and is set to climb further over the next few months, this is primarily due to unfavourable base effects resulting from the sharp fall in oil prices a year ago and is highly unlikely to mark the start of a significant building up of inflationary pressures" said Howard Archer, economist at IHS Global Insight.

In November 2008 the cost of a barrel of crude oil averaged roughly $60, while this month it had not gone below $72.

The European Central Bank wants inflation to be just below 2 percent over the medium term, which it defines as 18-24 months.

The bank meets on interest rates on Thursday. Markets expect it to leave its main refi rate unchanged at a record low of 1 percent since price growth is unlikely to come close to the ECB's target next year. 

"Headline inflation will rise further, to around 1 percent next month, and then settle at around those levels next year" said Nick Kounis, economist at Fortis.

While headline inflation is likely to inch higher, core inflation, which excludes volatile energy and unprocessed food prices, is likely to continue lower, economists said.

The ECB watches core inflation developments closely.

"With core inflation likely to remain subdued and eventually fall in response to the huge amount of spare capacity in the economy, the headline rate is likely to begin to drop again in the spring and could eventually fall below zero again" said Ben May, European economist at Capital Economics.

"Accordingly, while the ECB might signal the start of an unwinding of its unconventional policy measures on Thursday, interest rates will remain at their current low level for the foreseeable future" May said.

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