Europe CPI Accelerates to 4%

Inflation in Europe accelerated to the fastest in more than 16 years in June, led by a 53 percent surge in the cost of heating oil.

The inflation rate in the euro area rose from 3.7 percent in May, the European Union statistics office in Luxembourg said today. That matched an estimate published on June 30. Transport fuels rose 19 percent from a year earlier and, with heating oil, had the biggest upward impact on the inflation rate in June.

Soaring consumer prices prompted the European Central Bank to raise its key interest rate to a seven-year high of 4.25 percent this month. While ECB President Jean-Claude Trichet on July 9 called the inflation rate ``worrying'' and ECB council member Miguel Angel Fernandez Ordonez said the central bank ``must act firmly'' if needed, cooling economic growth may limit its scope for further rate increases.

Bonds extended their gains after the inflation report. The yield on the German 10-year bund, Europe's benchmark government security, fell 3 basis points to 4.35 percent at 12:23 p.m. in London. The yield on the two-year note dropped 2 basis points to 4.28 percent. The euro was little changed at $1.5910.

Energy-price inflation accelerated to 16 percent in June from 13.7 percent in May, according to today's report, the highest since the statistics office began compiling the data for the euro area in 1996. Oil prices have risen 86 percent in the past year and reached a record $147.27 a barrel last week. Food- price inflation stayed at 6.4 percent, also the highest since 1996.

High costs for food ``are here to stay,'' according to Nestle SA Chairman Peter Brabeck-Letmathe. Food prices ``will establish themselves on a higher level but not at the peaks we have seen in some weeks,'' he said last month.

The ECB in June raised its inflation forecasts to about 3.4 percent for this year and 2.4 percent in 2009. It previously forecast annual gains in consumer prices would average about 2.9 percent in 2008 and 2.1 percent next year.

Rising prices are threatening to damp growth further by sapping household budgets and boosting production costs. Euro- area industrial output fell the most in almost 16 years in May. In Germany, investor confidence declined to the lowest since the index was first compiled in 1991, the Mannheim-based ZEW Center for European Economic Research said yesterday.

Inflation in Germany, Europe's largest economy, quickened to 3.4 percent last month, the fastest pace in 12 years, according to a separate report today. Price increases in France accelerated to 4 percent, also the highest in 12 years.

In the euro area, the core inflation rate, which excludes energy, food and tobacco, rose to 1.8 percent in June from 1.7 percent in May.

Europe CPI Accelerates to 4%, Bloomberg
7/16/2008 6:39:05 AM