Eurozone inflation up 0.4% last month

Inflation in the eurozone edged up slightly in October, reinforcing the view that the ECB will hold fire on any additional policy action at its meeting next week.

A first estimate from the EU’s statistics office yesterday showed consumer prices in the eurozone rose by 0.4% in October, in line with market expectations. A day earlier, German data showed inflation in Europe’s largest economy slowing in October to 0.7%, its lowest reading since May.

Nick Kounis, head of macro research at ABN AMRO, said a number of factors meant ECB action as early as next week was unlikely, but that he expected further measures by the first quarter of next year.

“We still think that the ECB is likely to further step-up its monetary easing,” he said “If you get any kind of economic shock with inflation this low, there is a risk, albeit a small risk, of deflation.”

ECB policymakers still appear somewhat divided on the likelihood of deflation in the eurozone.

The central bank’s chief economist Peter Praet told Belgian media earlier this week that the possibility was limited, but Governing Council member Ignazio Visco said yesterday that policymakers needed to remain cautious. “We are not in deflation but we cannot ignore the concrete risk of it,” he said.

The statistics office said prices rose fastest for services, up 1.2%, followed by a 0.5% increase in food, alcohol, and tobacco costs.

Unprocessed food prices fell 0.1% year-on-year in October while energy was 1.8% cheaper, a slowdown in the rate of decline from September when prices for these goods dropped 0.9% and 2.3%, respectively.

Excluding unprocessed food and energy, prices rose 0.8% in October, a stable rate from September. This number is referred to as core inflation by the ECB.

The euro initially strengthened against the dollar and the pound following the release of the data but quickly gave up these gains and remained below levels seen at the start of the trading session.

The ECB, which has a mandate to keep inflation below but close to 2%, has committed to an expansionary policy, including an asset-buying plan, and has said it will consider further measures if needed.

Better-than-forecast economic sentiment figures on Thursday, which also showed higher inflation expectations among consumers and producers, may give the central bank an incentive to hold off on further policy action before the end of the year.

“The small rise in eurozone consumer price inflation to 0.4% in October reinforces the already very strong likelihood that the ECB will sit tight at its November 6 policy meeting,” said Howard Archer of IHS.

Eurostat data also showed that unemployment in the eurozone remained unchanged at 11.5% in September.