EUROZONE INFLATION has surged to 3.6 per cent, the highest level for almost 16 years, on the back of soaring oil prices, all but ruling out any early cut in European Central Bank interest rates.

The increase, from 3.3 per cent in April, is a blow for the ECB, which celebrates its 10th anniversary on Monday. Inflation is far above its target of an annual rate “below but close” to 2 per cent.

But eurozone growth is slowing – dramatically in some member countries, such as Spain – which should eventually help ease price pressures, and official interest rates are widely expected to be left at 4 per cent at the ECB’s meeting next week.

Still, with eurozone inflation forecast to rise to rates approaching 4 per cent in coming months before declining only gradually, many economists expect eurozone borrowing costs to remain on hold for some time, possibly well into next year.

Highlighting the vulnerability of eurozone economic growth, Germany reported a dramatic 1.7 per cent fall in retail sales in April, extending a 2.2 per cent drop in March. Consumer spending has long been a significant weakness of Europe’s largest economy – which has seen growth powered by exports and investment.

Dirk Schumacher at Goldman Sachs in Frankfurt said the latest figure was “ridiculously low” and the retail sales data were notoriously unreliable. But “even a significant upward revision will not change the overall picture of continuing sluggishness of consumption in Germany”.

Fears about higher prices may help explain why consumers are holding back from spending across the eurozone, and Jean-Claude Trichet, the ECB president, is likely to strike a hawkish tone after next Thursday’s meeting. Earlier this week, Axel Weber, president of Germany’s Bundesbank – who sits on the ECB’s governing council – even raised the possibility of an ECB interest rate increase.

But speaking yesterday in Frankfurt, Mr Weber struck a more conciliatory tone, pointing out that while people were expecting higher inflation rates in the short term, expectations about the longer term “have increased only slightly and remain close to 2 per cent”. That showed that the single eurozone monetary policy “remains credible”, he said. – (Financial Times service)