FRANKFURT (AFX) - Euro zone inflation is expected to have continued its downward trend in July as the price rises from the twin shocks of high oil prices and recent agricultural crises subside, economists said.
They added the figures will increase the European Central Bank's room to cut interest rates, after a dovish August monthly report signalled the bank could ease rates soon. However despite mounting evidence of price moderation as well as worsening growth prospects in the euro zone, it is still far from clear if the ECB will cut interest rates at its next governing council meeting on August 30, economists said.
Economists polled by AFX News said they expect euro zone inflation, as measured by the Harmonised Index of Consumer Prices (HICP), to moderate to 2.8-2.9 pct in July, from a rise of 3.0 pct in June. Month-on-month inflation is seen falling by 0.1 pct, after rising by 0.1 in June.
The figures are due to be announced by Eurostat today, at 11.00 am London time.
Economists added today's July inflation data from France was a trifle disappointing, showing an unchanged rate year-on-year, but should not detract too much from the expected decline for the euro zone as a whole.
CPI data from Spain also published today was better than expected, up 0.2 pct month-on-month, as Spanish service price inflation fell to its lowest rate since June 2000.
Elsewhere in the euro zone, prices continued to moderate in July. Italy CPI was up 2.9 pct year-on-year, while German prices were unchanged from June and up 2.6 pct year-on-year.
"We expect a significant fall in July inflation and this should help the ECB to ease its rates slightly once the summer break is over", said Anja Hochberg at Credit Suisse. She said the data will show euro zone inflation reached its peak at the May rise of 3.4 pct, and expects the ECB's stability ceiling of 2.0 pct to be met in December.
Sharda Dean at Merrill Lynch said food prices, which leapt earlier this year in the wake of consumer fears about the safety of beef, will begin to moderate in July.
"We believe it is only a matter of time for further falls to materialise, as the food scares continue to subside," Dean said. The ECB expressed confidence in the August monthly report that inflation will continue to decline as the various "temporary" price shocks start to unwind and growth slips.
The bank also sounded a note of optimism on upcoming tariff settlements, saying "there are reasons to expect" current wage moderation will continue.
"The ECB sounds more convinced than previously that the current inflation retreat will continue," said economists at UBS Warburg, commenting on the report.
Economists said another factor helping inflation lower in the months ahead will be the euro, with the embattled currency finally expected to gain ground against the US dollar.
"If things turn out badly in the US the euro will rise... this will have a downward effect on inflation and on growth," said Julian von Landesberger at HypoVereinsbank.
But von Landesberger said while Friday's inflation data will be "comforting" for the ECB, it will not automatically trigger a rate cut. "The door is getting ever wider, but the question is whether the ECB will step in."
Economists noted ECB chief economist Otmar Issing had made distinctly hawkish remarks on inflation to the German daily Boersen-Zeitung the day before the August report was published. Issing said that inflation risks in the euro zone are currently "balanced" and the decline of inflation will be accompanied by risks. Economists said the interview could even be a more accurate reflection of the ECB's thinking as it was presumably given after the report was written.
The economists at UBS Warburg said the ECB still must be convinced inflation will fall to the 2 pct stability ceiling in the foreseeable future. "But at least it (the ECB) now appears to be in the starting blocks rather than on the training track," they said.