Inflation fell sharply in most countries in the region last month, due in large part to a surprise drop in food prices. This appears to have been driven by one-off factors relating to the outbreak of e.coli in Germany. As such, we may see a bounce in food inflation over the coming months as the lagged effects of the spike in global commodity prices over the past year or so continue to feed through. Nonetheless, the bigger picture is that inflation should continue to surprise on the downside over the next twelve months. With growth set to slow next year, monetary policy will therefore remain supportive.
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