INSTANT VIEW : Euro zone July inflation at 4.1 pct

(Reuters) - Euro zone inflation jumped to a new record high of 4.1 percent year-on-year in July as expected, data showed on Thursday.

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KEY DATA

Inflation

* Up to 4.1 percent from 4.0 percent in June.

Unemployment

* Steady at 7.3 percent in June. May figure revised up by 0.1 point to 7.3 percent.

ECONOMISTS' COMMENT:

NICK KOUNIS, CHIEF EUROPEAN ECONOMIST AT FORTIS:

"We do not have any details yet, but we think that rising energy prices had a slight upward effect, while the core probably also again edged up, as past rises in commodity prices and rising labor costs filtered through.

"If oil prices hold on to their recent falls, this could mark a peak for headline inflation, but it is likely to remain elevated for an extended period even then, with an upward trend in core inflation partly offsetting the impact of declining energy and food price inflation.

"The recent fall in inflation expectations and lower oil prices will - if sustained - ease the ECB's inflation fears, but we think it will continue to see the balance of risks to inflation over the medium term as being skewed to the upside and we still think further tightening remains likely in the coming months."

HOWARD ARCHER, CHIEF ECONOMIST AT GLOBAL INSIGHT:

"Inflation was clearly once again pushed up in July by a sharp jump in energy costs, as oil traded at a record high of $147 a barrel early in the month and the marked falling back later on in the month occurred too late to counter this.

"Meanwhile, food prices also remained elevated. Although latest available data show that core inflation is well below the headline rate and has only risen modestly so far, this will be of limited comfort to the ECB.

"The ECB remains worried that the higher the headline inflation rate goes, and the longer it stays elevated, the greater will be the danger of major second round inflationary effects occurring.

"The ECB is particularly concerned that pay settlements could be markedly higher across the euro zone, and Eurostat data show that there was a pick up in euro zone wage growth in the first quarter."

PHYLLIS PAPADAVID, CURRENCY STRATEGIST SG:

"The inflation numbers are worth watching to the extent that the ECB sits up and takes notice of them... and they are more biased to rate increases, although there is negative sentiment on the growth dynamic."

MARTIN VAN VLIET, ECONOMIST AT ING BANK:

"The further increase in Eurozone inflation in July will intensify the ECB's already alarming concern about inflation prospects and may revive talk of a further ECB rate hike.

"However, with oil prices off their peak and downward momentum in economic activity gathering pace, dampening inflationary pressures in the medium term, the most likely path for interest rates is to be on hold for the rest of the year.

"Euro zone headline inflation rose from 4.0 percent in June to 4.1 percent in July. The further increase probably mainly reflects a higher rate of consumer energy price inflation, even though oil prices in euro terms, on average, were lower than in June.

"This is because some consumer energy prices do not immediately respond to changes in oil prices. Consumer gas prices, for example, tend to follow oil price trends with a lag of about six months.

"However, provided that oil prices do not move back up again, the peak in inflation seems near. Indeed, if current lower oil prices are sustained, headline inflation could fall back below 3 percent by mid-2009.

"What is more, the significant economic downturn that is now underway should help bring inflation back towards the 2 percent target in early 2010.

"Given the ECB targets inflation on an 18- to 24-month horizon (so it is focused on where inflation is likely to be in 2010) this means it can refrain from tightening policy further."

HOLGER SCHMIEDING, ECONOMIST AT BANK OF AMERICA:

"Both data were pretty much in line, with unemployment revised up. We do see a peak in inflation which was probably reached with 4.1 percent in July.

Current oil prices suggest that inflation will be below 3.5 percent by the end of the year.

Unemployment is rising already and the question for the ECB will be whether the downturn in the economy and labor market which is starting to unfold, whether they believe that is enough to get inflation under control again or whether they have to take sterner measures."

STEPHANE DEO, ECONOMIST AT UBS:

"Inflation is up as expected and I think will go up again next month and then will drop quickly over the rest of the year but activity is still weak.

We still expect the ECB to hike in September as inflation is too high and that is their primary concern. But it's a close call as activity is very weak now."

MARKET REACTION

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LINKS

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