LONDON (AP) — Inflation in the 17 countries that use the euro unexpectedly fell in July, official figures showed Friday, raising speculation that the European Central Bank may not need to raise interest rates as quickly as markets have been predicting.
Eurostat, the EU's statistics office, said consumer prices in the eurozone rose by 2.5 percent in the year to July.
That's still above the ECB's target of keeping inflation just below 2 percent, but down on market expectations for an unchanged reading of 2.7 percent.
Despite the debt crisis that has engulfed the eurozone and signs of waning economic activity, the markets have been pricing in another interest rate increase from the ECB in September.
The bank has already raised its main interest rate a quarter of a percentage point on two occasions this year to 1.5 percent from the record low of 1 percent to get inflation back to target. Rate-setters have been worried that above-target inflation following a marked rise in energy and commodity costs may feed through into wages, setting off a wage-price inflation spiral.
"July's figures came as something of a pleasant surprise and provide some support for our view that the ECB may not raise interest rates again over the coming months," said Jonathan Loynes, chief European economist at Capital Economics.
Eurostat did not offer any explanation why inflation fell. Further details will emerge in the middle of August when it publishes a more comprehensive report.
Loynes suggested that a sharp fall in Italian inflation may have been responsible for the surprise decline.
The euro was steady after the report, possibly because investors are more focused on developments in the U.S. debate to raise the debt ceiling.
Copyright 2011 The Associated Press.