European Union January inflation rises above estimates, ECB unlikely to act



High Inflation and Differential Growth Makes ECB's Job Difficult

High Inflation and Differential Growth Makes ECB’s Job Difficult

The consumer price index for the Eurozone countries jumped more than expected in January, well above the targeted rate of the European Central Bank (ECB). However, few expect the central bank to raise interest rates to battle spiraling inflation.

According to statistics released by Eurostat on Monday, inflation for the 17 member eurozone rose by 2.4 percent year-on-year in January. The inflation rate for December was recorded at 2.2 percent

Inflation for January is the highest since October 3.2 percent, when it was recorded at 3.2 percent. ECB’s stated target inflation rate has been 2 percent. When officials of the central bank meet next on Thursday, they also need to discuss the challenges of differential growth rates among member nations.

Howard Archer – economist at HIS Global Insight said: “While the ECB will be far from happy to see euro zone consumer price inflation move further above target, it is still highly unlikely to prompt the bank into action at its February policy meeting”.

Mr. Archer went on to add that “It will probably step up its anti-inflation rhetoric and stress that it is prepared to hike interest rates despite growth risks if the current spike-up in euro zone consumer price inflation shows any significant sign of leading to a significant pick-up in second round inflationary effects, such as rising wage settlements”.

Economists believe energy and food prices have driven the price index up although Eurostat did not provide the breakdown of price basket.

The ECB said it expects inflation to be higher than projections in the coming months and peaking in March and then go down.

Ewald Nowotny – an ECB governing council member had said last Tuesday that he does not expect interest rates to go up before the next half of 2011.

Economists however, conclude that raising rates and keeping the balance will be difficult as EU continues to grow at different rates with countries like Germany marching on steadily while peripheral states like Spain, Greece and Ireland struggle with their economies.

“The peripheral countries are facing serious deflationary risks. By contrast, the output gap is closing in Germany, where the unemployment rate is already below the pre-crisis level. Therefore, some upward pressures are likely in Germany”, said Clemente de Lucia – economist at BNP Paribas.

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