Story:

MARKET REACTION

ECONOMIST COMMENTS

NICK KOUNIS, FORTIS:

"The rebound probably largely reflects a sharp jump in annual energy inflation, which became much less negative last month. We think that core inflation was probably stable at 1.1 percent YoY, although it has been on a gradual downward trend since the turn of last year.

"Looking forward, we think that headline inflation will rise further, to around 1 percent next month, and then settle at around those levels next year.

"Annual energy inflation will turn positive next month and will then most likely have an ongoing upward impact on inflation. Working in the other direction, we are likely to see a further slowdown in core inflation, as the large amount of slack in the economy bears down on price pressures.

"Overall, the HICP report confirms that the outlook is for low, below-target inflation rather than deflation and supports the ECB's steady-hand approach to monetary policy. This means that it did not go over-the-top in terms of the extent of its unconventional easing during the crisis, but also that it is unlikely to need to hike rates for quite some time now that a recovery has begun."

HOWARD ARCHER, IHS GLOBAL INSIGHT:

"The euro zone exited deflation in November as consumer price inflation rose by 0.6 percent year-on-year. However, while inflation was higher than expected in November and is set to climb further over the next few months, this is primarily due to unfavourable base effects resulting from the sharp fall in oil prices a year ago and is highly unlikely to mark the start of a significant building up of inflationary pressures.

"Indeed, consumer price inflation still seems set to stay below the ECB's target rate of 'close to but just below 2.0 percent' through 2010 and beyond.

"Underlying inflation across the euro zone should continue to be held down by large output gaps across the region and relatively gradual recovery, low capacity utilisation, high and rising unemployment, and a strong euro.

"Indeed, latest data show that core euro zone inflation retreated further to a nine-year low of 1.0 percent in October, from 1.1 percent in September and a peak of 2.6 percent in August 2008.

"Even though the euro zone returned to growth in the third quarter, economic activity is unlikely to be strong enough to generate significant inflationary pressures for some considerable time to come due to the still serious economic and financial handicaps that the region faces.

"Significantly, the European Commission's business and consumer confidence survey shows that the selling-price expectations of manufacturers, service companies, and retailers were still very low compared to long-term norms in November, as were consumers' inflation expectations.

"Furthermore, the composite-prices-charged index of the manufacturing and the service-sector purchasing managers' surveys showed prices falling in November for the 13th month running, albeit at a reduced rate.

"Higher-than-expected euro zone consumer price inflation in November is unlikely to alarm the ECB given that it is primarily an energy price base effects story and underlying inflationary pressures currently remain depressed. Indeed, there remains a compelling case for the ECB to only very gradually withdraw its emergency liquidity measures, and to keep interest rates down at 1.00 percent until deep into 2010.

"Indeed, the euro zone economy is still hardly racing ahead and serious obstacles remain to sustainable healthy growth with the result that relapses currently remain highly possible."

LUIGI SPERANZA, BNP PARIBAS:

"It is slightly higher than we had expected. I suspect the surprise comes mainly from volatile components, food and energy. From what we have seen in Germany, I'll expect to see core inflation go down on the month. The underlying trend remains quite subdued. I suspect too that the rebound will continue in headline inflation.

"I think policymakers will look at it in the same way. I think base effects are known and it is backward-looking. They will very much focus on the underlying trend. This was emphasised in one of the latest bulletins. In this case, at this stage, the underlying trend in inflation is more important as an indication of the future outlook and I believe they'll conclude there are no inflationary pressures."

BEN MAY, CAPITAL ECONOMICS:

"November's euro zone flash CPI figures confirmed that inflation has returned to positive territory, but underlying inflationary pressures remain subdued.

"The rise in annual CPI inflation from -0.1 percent to 0.6 percent (consensus +0.5 percent) was probably almost entirely down to energy effects. Energy inflation looks set to continue to rise over the next month or two and could push the headline rate above 1 percent early next year.

"But with core inflation likely to remain subdued and eventually fall in response to the huge amount of spare capacity in the economy, the headline rate is likely to begin to drop again in the spring and could eventually fall below zero again.

"Accordingly, while the ECB might signal the start of an unwinding of its unconventional policy measures on Thursday, interest rates will remain at their current low level for the foreseeable future."

LINKS

For further details, Reuters 3000 Xtra users can click on: http://europa.eu.int/comm/eurostat/

For a one-page snapshot of real-time G7, euro zone and Swiss economic data releases, click on Keywords: EUROZONE ECONOMY/INFLATION (Brussels newsroom, tel +32-2-287-6830, fax +32-2-230-5573, e-mail: brussels.newsroom@reuters.com)

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