Euro zone businesses have strongest month this year in October - PMI

By Jonathan Cable

LONDON (Reuters) - Business activity in the euro zone has expanded at the fastest rate this year in October, even as firms raise prices at the sharpest rate in more than five years, a survey showed on Monday.

The upturn in both activity and prices will make welcome reading for policymakers at the European Central Bank, who left their ultra-loose policy unchanged last Thursday but kept the door open to more stimulus in December.

IHS Markit's euro zone flash composite Purchasing Managers' Index, seen as a good overall growth indicator, jumped to 53.7 from September's 52.6. It was the highest reading since last December and far above the 50 point line indicating growth in activity.

It smashed even the highest forecast in a Reuters poll of economists which had predicted a more modest rise to 52.8.

"It's an encouraging picture. There are plenty of signs here that this number is going to keep improving as a lot of the sub-indexes are cementing a picture of better headline PMI numbers coming through," said Chris Williamson, chief business economist at IHS Markit.

Williamson said that if maintained, the PMI pointed to 0.4 percent growth in the current quarter, although he added that there were upside risks to that prediction. A Reuters poll last week predicted a more modest growth rate of 0.3 percent.

Inflation is nowhere near the ECB's 2 percent target ceiling - it was just 0.4 percent in September - so evidence of increasing price pressures could dampen expectations that the ECB extends its massive asset-buying programme.

A subindex measuring output prices jumped to 50.5 from 50.0, its highest level since August 2011.

"It's a shift from a buyer's market to a seller's market which is associated with prices rising. It's early days yet but it's a shift in the right direction," Williamson said.

The bloc's dominant service industry also performed much better than expected. Its PMI came in at a nine-month high of 53.5, ahead of September's 52.2 and beating all forecasts in a

Reuters poll where the median call was for 52.4.

Suggesting the acceleration could continue into November, new business soared. The index registered 53.2, up from 52.5.

Manufacturers followed the same trend. The factory PMI climbed to a 30-month high of 53.3, above the poll median and September's 52.6, while the output index, which feeds into the composite PMI, jumped to 54.4 from 53.8.

Highlighting the confidence about the coming months amongst manufacturers, they increased headcount at the fastest rate since May 2011. The employment subindex was 53.7 compared to September's 52.1.