Euro-zone inflation acclerates to fastest since 2008
European inflation accelerated to the fastest pace in 20 months in July on rising energy prices.
Consumer prices in the 16 nations that use the euro increased 1.7pc from a year earlier after rising 1.4pc in June, the European Union statistics office in Luxembourg said today. That’s the fastest inflation since November 2008.
Accelerating price increases may complicate the European Central Bank’s gradual exit strategy from its non-standard measures as tighter monetary policy could damp the economic rebound later in the year.
Slower growth in the US and China may crimp euro-area exports, a mainstay of the recovery so far, and fiscal-austerity measures across Europe may curb domestic spending in the region.
“The inflation rate is closing in on the ECB’s comfort zone,” said Laurent Bilke, an economist at Nomura International and former ECB forecaster. “Whether the ECB will be worried about it depends entirely on how it thinks the economy will evolve.”
The euro was little changed against the dollar after the data, trading at $1.2789 at 10:05am in London, up 0.3pc on the day.
While ECB Governing Council member Athanasios Orphanides told Reuters in an interview published on Aug. 9 that he’s “not worried” about inflation as the recent increases have been driven by “energy-price swings,” his colleague Guy Quaden told La Meuse newspaper that the ECB needs to be “more attentive about this issue.”
Energy prices increased 8.1pc in July from a year earlier, today’s report showed, compared to a 6.2pc gain in the prior month. Core inflation, which excludes energy and other volatile components, accelerated to 1pc last month from 0.9pc in June.
Oil prices have increased 8pc over the past two months just as the euro’s recent advance adds pressure on companies to cut prices by making European exports less competitive abroad. The single currency has gained 4pc against the dollar in the past two months, paring annual losses to 9pc.
The central bank aims to keep annual price gains just below 2pc and President Jean-Claude Trichet said he will announce next month how the ECB will scale back its program of unlimited loans to banks, a plan the Frankfurt-based bank implemented in 2008.
Trichet will have to gauge the timing of when to tighten policy. Pulling back too soon could choke off credit and roil markets, while acting too late could stoke inflation.
For now, the economy shows signs of weathering a stronger euro and the Greece-led fiscal crisis. The euro-area economy expanded at the fastest pace in four years in the second quarter.
Adding to signs an export-led recovery is feeding into the wider economy, growth in Europe’s services and manufacturing industries accelerated in July and economic confidence rose to the highest in more than two years.
From the prior month, July consumer prices declined 0.3pc, today’s report showed.