ECB Effort to Contain Crisis Is Complicated by Surprise Surge in Inflation

European inflation unexpectedly accelerated to the fastest in almost three years in September, complicating the European Central Bank’s task as it fights the region’s worsening sovereign-debt crisis.

The euro-area inflation rate jumped to 3 percent this month from 2.5 percent in August, the European Union’s statistics office in Luxembourg said today in an initial estimate. That’s the biggest annual increase in consumer prices since October 2008. Economists had projected inflation to hold at 2.5 percent, according to the median of 38 estimates in a Bloomberg survey.

Faster inflation increases pressure on an economy already hurt by tougher austerity measures and waning investor confidence as governments struggle to contain the fiscal crisis. European economic confidence slumped more than economists forecast this month and German retail sales fell the most in more than four years in August. Commerzbank AG said today that the region “looks set to slip into a recession.”

“It’s more of a technical thing than a fundamental change,” said Laurent Bilke, global head of inflation strategy at Nomura International Plc in London, which was the only bank to forecast the right inflation rate in the Bloomberg survey. “The ECB is not going to cut in October and obviously strong inflation doesn’t give them much room for maneuver on that side. They will probably need a few more months of negative economic news to get there, maybe in November or December.”

The euro extended declines after the report, trading at $1.3493 at 12:49 p.m. in Brussels, down 0.7 percent on the day. The Euro Stoxx 50 Index dropped as much as 2.3 percent.

Greek Default

Investor concern that European governments may be unable to contain the debt crisis and prevent a Greek default has weighed on equity markets and pushed the euro lower. Germany’s benchmark DAX Index (DAX) has shed 21 percent over the pasts two months, with the Stoxx Europe 600 Index down 14 percent.

The ECB, which aims to keep annual gains in consumer prices just below 2 percent, said earlier this month that inflation may average 2.6 percent this year and 1.7 percent in 2012. Economic growth may weaken to 1.3 percent next year from 1.6 percent in 2011, it said.

Italy’s harmonized inflation quickened to 3.5 percent in September from 2.3 percent in August. In Germany, Europe’s largest economy, inflation also accelerated more than economists forecast this month, with consumer prices rising 2.8 percent from a year earlier, up from an annual 2.5 percent. Spain’s harmonized inflation rate jumped to 3 percent from 2.7 percent. There’s no September data available for France.

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via ECB Effort to Contain Crisis Is Complicated by Surprise Surge in Inflation – Bloomberg.

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