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UPDATE 1-Euro zone prices fall in Sept, Oct rebound seen

Published 10/15/2009, 06:34 AM
Updated 10/15/2009, 06:36 AM
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(Adds economists' comments)

By Jan Strupczewski

BRUSSELS, Oct 15 (Reuters) - Cheaper energy and food pulled down consumer prices in the euro zone in September compared with a year earlier, data showed on Thursday, but economists said there could be a rebound this month.

Consumer prices remained unchanged in September against August for a 0.3 percent year-on-year decline, the European Union statistics office said, confirming its estimate made two weeks ago of the annual measure and meeting market expectations.

"From October, the trend in headline inflation should reverse, as energy-related base effects fade from the year-on-year comparison," said Eoin O'Callaghan, economist at BNP Paribas.

"A recovery in soft commodity prices also points to a bottoming out in food inflation in the coming months," he said.

The European Central Bank wants inflation to be just below 2 percent over the medium term and has kept interest rates unchanged at a record low of 1 percent since May.

"With euro zone deflation widening in September and underlying inflationary pressures easing further, there is a compelling case for the ECB to retain an accommodative stance for many months to come," said Howard Archer, economist at IHS Global Insight.

September marked the fourth straight month of falling prices in the 16-country euro zone, but ECB Governing Council member Ivan Sramko said in Bratislava there was growing conviction that the single currency area would not experience deflation.

Core inflation, which strips out volatile food and energy prices, was 0.2 percent on the month. It continued to decline in year-on-year terms, to 1.1 percent from August's 1.2 percent.

The ECB watches core inflation closely for signs of inflationary pressure.

"With a lot of slack in the economy and wage growth still to reflect the impact of rising unemployment, it seems that the downward trend in core inflation has a lot further to go," said Nick Kounis, economist at Fortis.

"In contrast, energy and food price inflation -- the key factors bearing down on inflation this year -- will almost certainly rebound sharply going forward, which should take the headline rate to around 1 percent over the next few months."

The Eurostat data showed energy prices fell 1.2 percent on the month for an 11.0 percent year-on-year decline. Food prices were flat against August and 1.3 percent lower than a year before.

Economists expect that despite signs of economic recovery, the ECB will keep interest rates unchanged until the third quarter of 2010 because inflation is low and inflation expectations are anchored at the ECB's price stability target. (Editing by Dale Hudson)

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