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Euro zone consumer price inflation jumped unexpectedly to 3.0 percent in September, its highest level in almost three years, heaping doubt on bets that the European Central Bank will cut interest rates next week.
In an estimate from the EU's statistics agency Eurostat, the inflation figure for the 17 countries that share the euro increased from the 2.5 percent in August to its highest since October 2008.
Economists polled by Reuters had forecast an unchanged rate and remain confident it will soon fall back as the economy slows.
"It's not a nice number but I wouldn't panic," said Martin van Vliet, an economist at ING, who sees inflation moving lower over the next few months as oil and food prices ease. "Still, I think today's figures will mean the ECB does not lower interest rates next week."
Expectations had been growing among investors of a possible interest rate cut to support the weakening European economy as the region's debt crisis and government spending cuts sap business confidence and raise the spectre of another recession.
Other data out on Friday highlighted the extent of Europe's slowdown.
German retail sales fell at their fastest monthly pace in more than four years in August, tumbling 2.9 percent on the month as fears of the euro zone debt crisis spiralling out of control weighed on consumer sentiment, while French consumer spending was flat over July and August.
Investment bank J.P Morgan said last week it sees the ECB cutting rates by 50 basis points to 1.0 percent next week. A Reuters polls of 76 economists this week found 56 forecasting no move at President Jean-Claude Trichet's last meeting but a majority expecting a cut in early 2012, following two rate rises this year.
The ECB changed its tone at its last rates meeting in early September and opened the door to cuts, signalling that it had halted a cycle of interest rate rises begun five months ago.
Trichet said then that there were "intensified downside risks" for the euro zone's economy and the bank expects inflation to be below 2 percent in 2012.
Many economists say Mario Draghi, who takes over from Trichet in November, would benefit from a cut just before he starts his term or risk being painted as a policy dove if the move is left to him.
But for Trichet to use his swansong to cut rates while inflation is so far above the ECB's target of close to but below two percent would run totally against the grain of the central bank.
The euro zone may have to wait for further signs of slowdown, and easing prices pressures, before it gets looser monetary policy -- although both look set to happen.
"The downturn has eased commodity prices. ... Consequently, we should see an easing of energy price inflation, the largest contributor to headline inflation in past months," said Clemente De Lucia, an economist at BNP Paribas.
INFLATION'S "LAST REVOLT"
Even as inflation surged in September, economists pointed to statistical discrepancies after Eurostat tweaked the way it calculated price data over the summer as well as value added tax increases in Italy, adding that they did not believe the price rises were the start of a trend.
In Germany, the region's biggest economy, annual consumer prices rose to 2.6 percent in September from 2.4 a month earlier, Italy's rate leapt to 3.5 percent while Spanish inflation rose to 3.0 percent from 2.7.
But Eurostat's new way of registering seasonal goods drove the inflation rate down in July for the euro zone, and was corrected this month, economists say.
Italy's centre-right government, under speculative attack as investors question its ability to manage its massive debts, hiked VAT by 1 percent to 21 percent this month, despite popular protests.
Brent crude prices, which have been a big factor in euro zone inflation, are poised for a monthly drop of 9.3 percent, the biggest since May 2010, as a slowing economy hits demand in Europe, the United States and Asia.
"This is the euro zone's last revolt of inflation," said Commerzbank analyst Christoph Weil. "As the euro zone edges towards recession, inflation pressure will ease significantly."
Eurostat also reported unemployment for August, which in the euro zone was unchanged from July at 10 percent and down slightly from 10.2 percent in the same month a year ago.
The reading suggests companies are not yet laying off staff, but that could change, making it harder for unions across the euro zone to lobby for wage increases.
"Inflation pressure from the cost side should ease overall," said Commerzbank's Weil, predicting ECB rate cuts in December and in March, both by 25 basis points.