Europe witnesses higher than targeted inflation



Eurozone witnessed higher than targeted inflation for the first time in two years. Economists are however, not pressing the panic button just yet. They believe the European Central Bank (ECB) will continue with its low interest rates throughout 2011.

The single currency 16 member union recorded an inflation rate of 2.2 percent year-on-year for the month of December. Inflation for the month of November was registered at 1.9 percent.

This is the biggest rise since October 2008, when inflation was recorded at 3.2 percent. A recent poll by Reuters showed that Economists expected inflation at 2%. The ECB wants to contain inflation just below 2%.

Economists attribute the rather higher inflation to rise in oil and commodity prices. Nick Kounis, Head of Macroeconomics research at ABN AMRO Bank said: “This commodity-price driven rise in inflation will only have implications for ECB policy if the central bank were to see second round effects emerging, in terms of knock-on effects on other prices or rising inflation expectations”.

“That only seems likely if we were to see a long period of high inflation, but on the basis of current levels of commodity prices, we think that inflation will ease back down again during the course of this year”, he added.

Oil prices between November and December went up by €7 per barrel, the highest in a single month in two years, said Economist Clemente De Lucia of BNP Paribas.

Overall energy prices were up 10 percent year-on-year in general and oil prices were up by €18 per barrel, YoY, claimed Clemente.

Arguing that in November, more expensive heating oil and gas, Transport fuel were the main drivers for inflation, economists say that the situation worsened after some countries decided to hike tax rates to bridge budget deficits.

After adjusting for these factors, Real Inflation should not be higher than 1 percent, they reasoned, negating the prospect of any immediate interest rate hike by central banks.

Christopher Weil of Commerzbank said: “There is no need for monetary policy to act, with underlying inflation still at 1 percent. We continue to expect the ECB to start hiking rates only in 2012”.

However, there are others who predict an interest rate hike prior to 2012. Thomas Meyer – Chief Economist, Deutsche Bank said: “We are predicting inflation of 2 percent in 2011 and that means that keeping interest rates at historical lows will no longer look appropriate”.

“We think that the ECB will have to move interest rates upwards in the second half of the year. It is the beginning of a careful normalisation”, he added.

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