Eurozone CPI Highest in 16 years

Eurozone inflation has been revised up to the highest level for 16 years and a European Central Bank official has warned that rising wage costs could add increasingly to the pressures created by soaring oil prices.

Annual inflation in the 15-country region last month was 3.7 per cent, according to Eurostat, the European Union’s statistical office. That was up from 3.3 per cent in April.

Higher inflation rates have not been recorded since the eurozone was created in January 1999 and not since June 1992 on a comparable basis. Eurostat had originally reported a 3.6 per cent inflation rate for May.

Inflation has been driven higher by sharp rises in oil and food prices – and is expected to move closer to 4 per cent in coming months. But the ECB has shown signs of becoming more worried about more general price pressures, which helps explain why it has announced that it is likely to raise its main interest rate by a quarter percentage point to 4.25 per cent in July.

Earlier this month, Jean-Claude Trichet, ECB president, warned of mounting inflationary pressures in the service sector. But wage pressures are also emerging as an ECB concern.

An acceleration in wage growth at the start of this year could continue in 2008 in an economic environment characterised by tight labour markets, high capacity utilisation and persistently high inflation,” according to Lucas Papademos, ECB vice-president. His remarks were made in a speech at the weekend in South Korea but only released on Monday by the ECB.

The ECB’s fear is that high inflation rates caused by high oil price will become entrenched by feeding through into wage settlements. Data on Friday showed hourly eurozone labour costs rose by 3.3 per cent in the year to the first quarter – the fastest since early 2003.

The central bank hopes its planned increase in interest rates next month will send a strong signal about its determination to keep expectations about medium and longer term inflation rates firmly under control. The ECB aims to keep annual inflation below but close” to 2 per cent.

The ECB could take some encouragement from details of the latest inflation data, which showed core” inflation, excluding volatile energy and unprocessed food prices, rising only modestly in May to 2.5 per cent, from 2.4 per cent in April.

Within the eurozone, inflation rates continue to vary considerably. Slovenia reported an annual rate of 6.2 per cent in May and Belgium, Greece, Spain, Cyprus, Luxembourg, Malta and Finland all reported rates in excess of 4 per cent. At the other extreme, inflation was just 2.1 per cent in the Netherlands.

Eurozone CPI Highest in 16 years

Financial Times
6/16/2008 6:09:26 AM