UPDATE 1-Oil boosts euro zone prices, inflation seen slowing

* Oil boosts July euro zone inflation

* VAT hikes push up core inflation

* Year-on-year rate remains contained at 1.7 percent

* Price growth seen slowing

By Jan Strupczewski

BRUSSELS, Aug 16 (BestGrowthStock) – Oil drove euro zone inflation
to a 20-month high in July and core inflation inched up, but
price rises are likely to slow in the second half of the year as
budget cutbacks weaken economic recovery.

Consumer prices in the 16 countries using the euro dipped
0.3 percent month-on-month in July but still rose 1.7 percent in
annual terms, the European Union’s statistics office Eurostat
said on Monday.

The annual figure was the same as earlier estimated by
Eurostat and in line with market expectations, although
economists had forecast a deeper month-on-month decline in the
index of 0.4 percent.

The European Central Bank wants to keep inflation at just
below 2 percent over the medium term and the figures, including
a 1.2 percent number in Germany, showed little threat to
expectations it can keep interest rates steady well into next
year.

But of bigger concern may eventually be how prices will fare
in harder-hit economies like Spain and Greece, where tax changes
are masking the disinflationary impact of a collapse in growth
and domestic demand.

“With plenty of spare capacity still in the economy and
fiscal austerity measures likely to ensure only a modest
recovery in the region as a whole, core and headline inflation
will soon begin to drift downwards again,” said Ben May,
economist at Capital Economics.
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The euro zone economy grew at its fastest rate in more than
three years in the second quarter at 1.0 percent
quarter-on-quarter thanks to a surge in German gross domestic
product combined with a solid if less impressive rise in France.

This was well above second-quarter growth in the United
States, which is showing signs of flagging at 0.6 percent while
economic expansion in Japan slowed to a crawl of 0.1 percent in
the same period, adding to long-term problems with deflation.

VAT IMPACT

Without the volatile energy and unprocessed food prices — a
measure that the ECB calls core inflation — the monthly decline
of prices was 0.5 percent for a 1.0 percent annual rise — as
expected by economists polled by Reuters.

Energy prices were flat month-on-month in July but 8.1
percent higher year-on-year. Prices of clothes fell 9.7 percent
against June and only rose 0.7 percent on a year earlier.

Economists said the higher core inflation primarily
reflected the impact of Value Added Tax increases in Spain,
Portugal, Greece, and Finland, which are trying to reduce budget
deficits to put public finances on a sustainable path.

“With underlying inflationary pressures continuing to be
held down by the still-substantial margin of spare capacity in
the economy — despite the 1 percent quarter-on-quarter surge in
Q2, euro zone real GDP remains nearly 4 percent below its
first-quarter 2008 peak — we believe there is little reason for
the ECB to consider a rate hike anytime soon,” said Martin van
Vliet, economist at ING.

“Indeed, with inflationary pressures beneath the surface
remaining muted, ECB rate hikes should be a story for later next
year,” he said.

In the euro zone’s biggest economy Germany, where the
economy grew by at the fastest rate since reunification in the
second quarter, July inflation was only 0.3 percent month on
month and 1.2 percent year-on-year.

In France, prices fell 0.3 percent month-on-month in July
for a 1.9 percent annual increase.

But in Greece, which saw a deepening of economic recession
in the April-June period, prices were still 5.5 percent higher
in July than a year earlier. Spain, where the economy expanded
only 0.2 percent in the second quarter, saw prices grow 1.9
percent year-on-year.

(Reporting by Jan Strupczewski, editing by Luke Baker and
Patrick Graham)

UPDATE 1-Oil boosts euro zone prices, inflation seen slowing