Euroland: Flash CPI rose to 4.1 % in July

Today Eurostat released its preliminary estimate for the CPI. Consumer prices rose by 4.1 % y/y in July from 4 % y/y in June, in line with consensus. The markets did not react to the news.

Going forward we still expect to see inflation spike in Q3 at a level around 4.2 % y/y, thus partly raised by the lagged effects from changes in commodity prices. In addition to this, there may also be a risk that administrated prices will be raised due to second round effects from higher commodity prices.

During H2 we expect a gradual reduction in inflation due to favourable base effects and falling energy and food prices. However, a faster improvement may take place, as we already have seen a rather significant decline in the oil price, from USD145/barrel at the beginning of July to USD126/barrel today, also food prices have declined recently.

At its July meeting, the European Central Bank (ECB) raised the interest rate by 25 basis points. At that time it was concerned about the forthcoming second round effects from higher energy prices. The ECB estimates that inflation is likely to remain well above 2% y/y for quite some time, moderating only gradually in 2009. We expect the ECB to be on hold for a prolonged period.

Eurostat also published the unemployment figures for June. They showed an unchanged reading from a revised 7.3 % reading in May.

Danske Bank

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