Euro zone inflation accelerates to defy expectations

EURO ZONE inflation accelerated faster than expected in December, taking price rises above the European Central Bank (ECB) target for the first time in two years and prompting speculation about when the central bank will need to consider interest rate increases.

Consumer prices in the euro zone rose by 2.2 per cent last month compared to a year earlier, after increasing 1.9 per cent in the year to November, according to the European Union’s statistics office, Eurostat. This is the highest rate since October 2008.

The jump can be explained by an 8.6 per cent surge in the price of crude oil in December, which took the annual rise in crude oil prices above 15 per cent.

There has also been recent upward pressure on food prices.

The ECB, which aims to keep annual consumer price rises at or just below 2 per cent, forecast last month that euro zone inflation would average about 1.8 per cent in 2011 and 1.5 per cent in 2012.

Most economists do not expect the above-target rate of inflation to trigger price stability actions, such as interest rate increases, in the near future.

Analysts reported a calm market reaction to the data, pointing to the continued low core rate, which is the inflation rate stripped of price rises in energy, food and other categories.

“The core rate is still very weak at 1 per cent ahead of new data next week,” said Antje Praefcke, senior FX analyst with Commerzbank in Frankfurt. She sees no dramatic change likely in the coming year as long as the euro zone capacity rate remains low and jobless rates steady.

“The impetus for wage rises will increase in Germany in 2011,” she said, “but will be offset by lower impetus in periphery states.”

Nick Kounis, head of macroeconomic research at ABN Amro bank, said commodity-driven inflation would only have implications for ECB policy if the central bank were to see knock-on effects on other prices.

The ECB has kept its key interest rate at a record low of 1 per cent since May 2009.

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

However, Thomas Mayer, chief economist at Deutsche Bank, said it expected inflation of 2 per cent in the euro zone in 2011. “That means that keeping interest rates at historical lows will no longer look appropriate,” he said.

“We think the ECB will have to move interest rates upwards in the second half of the year.”

Figures published last week show that inflation in Germany, Europe’s largest economy, raced ahead in the last month of 2010, with prices posting the biggest monthly gain in eight years.

Germany’s strong economic performance is widening the divergences in the 17-nation currency zone, making it more difficult for the ECB to set interest-rate policy that is appropriate for all of its members.

Consumer prices in Ireland are far less robust than they are in Germany, with the latest reading from the Central Statistics Office (CSO) showing that prices rose just 0.6 per cent in the year to November. (– Additional reporting: Reuters)