Posted on 10/19/2005 1:28:43 AM PDT by M. Espinola
Eurozone inflation jumped in September to the highest annual rate since June 2001, revised data showed yesterday - but higher oil prices still show few signs of feeding through into other costs.
The leap in inflation, from 2.2 per cent in August to 2.6 per cent last month, means that the European Central Bank is almost certain to maintain the "strong vigilance" stance it adopted at its interest-rate setting meeting earlier this month.
Preliminary estimates had put September's inflation rate at 2.5 per cent. In Germany, separate Bundesbank data showed producer prices were rising at an annual rate of 4.9 per cent - the fastest rate since 1982.
The pick-up in price pressures could fuel speculation that the ECB will increase interest rates this year. However, "core" eurozone inflation, excluding oil prices, remains modest. Economists also argued that the weakness of the eurozone economy - in contrast to the US - and the slack in its labour markets had cut significantly the chances of energy costs spilling over into other prices.
Companies were not passing on costs to customers, "and they don't need to because they are being compensated with very benign wage developments", said Dirk Schumacher at Goldman Sachs. Jacques Cailloux, at JP Morgan, added: "In the US, core inflation is likely to creep up but that is not the view that we have in the eurozone."
Jean-Claude Trichet, ECB president, said in a letter to the European parliament released yesterday that the ECB would "act decisively if the increase in the price of oil was transmitted into other sectors of the economy, leading to second-round effects and/or higher inflation expectations". The ECB aims to keep headline inflation within its definition of price stability - a rate "below but close" to 2 per cent.
However, excluding oil and volatile unprocessed food prices, eurozone inflation was just 1.5 per cent in September, up from 1.4 per cent in August. On another "core" measure, inflation excluding energy, food, alcohol and tobacco was unchanged at 1.3 per cent.
Eurozone economic activity has shown signs of picking up recently but a leading indicator of investor confidence yesterday pointed to a stabilisation in Germany, the eurozone's largest economy. The economic sentiment index compiled by the Mannheim-based ZEW institute rose to 39.4 this month, from 38.6 in September. A much larger rise had been expected by economists.
ZEW said slightly lower oil prices and robust world economic growth had had a positive impact on its survey. But uncertainty remained about the new German government's economic policy. "Experts appear to fear that the speed of political reforms will slow down and that there will be no majority for important reform," it said.
* Alan Greenspan, chairman of the US Federal Reserve, yesterday warned that high oil prices would be a "drag" on global economic growth and called for an increase in refining capacity to avoid "a binding constraint on growth in oil use," writes David Ibison in Tokyo. "Although the global economic expansion appears to have been on a reasonably firm path through the summer months, the recent surge in energy prices will undoubtedly be a drag from now on," he said in a speech to businessmen in Tokyo.
Trichet raising interest rates in the eurozone would be disastrous.
I'd be more concerned about certain eurozone nations falling back into recession than the United States or Britain.
It could very well happen.
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