The unexpected rise from 3.1 per cent in December suggests that the hump” in inflation caused by higher energy and food prices will prove larger and longer-lasting than anticipated by the ECB.
January’s rate was the highest since the Frankfurt-institution took responsibility for monetary policy in the region in 1999.
Despite the US Federal Reserve’s moves to slash US borrowing costs, the ECB is expected to keep its main interest rate unchanged at 4 per cent next week and the latest inflation data could encourage Jean-Claude Trichet, ECB president, to repeat warnings that a rise still remains possible.
The ECB’s task has been complicated, however, by clear signs that the eurozone economy is slowing. Economic confidence in the 15-country region this month was the gloomiest since the start of 2006, according to the European Commission. Its economic sentiment index fell more-than-expected, from 103.4 points in December to 101.7 points.
Consumer spending appears to have been hit recent by fears about inflation – German retail sales fell by 1.8 per cent in the fourth quarter of last year, according to official figures. But other data painted a more upbeat picture: German seasonally-adjusted unemployment fell by a sharper-than-expected 89,000 this month to the lowest level for 15 years. Unemployment trends tend to lag behind developments in economic activity, however.
The ECB’s view is that eurozone growth is slowing but that economic fundamentals remain sound – with only parts of the region exposed to possible sharp corrections in house prices. Its forecast show growth this year lower than last year’s 2.6 per cent, but no dramatic deterioration – although it stress the downside risks to its projections..
Still, financial markets have become increasingly convinced that the ECB to follow the US Fed and start cutting interest rates later this year as clear evidence of a slowdown emerges.