Euro zone inflation at 20-month high

 

Consumer prices in the 16 nations that use the euro increased 1.7 per cent in July from a year earlier after rising 1.4 per cent in June, the fastest inflation since November 2008.

Accelerating price increases may complicate the European Central Bank's gradual exit strategy from its non-standard measures as tighter monetary policy could damp the economic rebound later in the year.

Slower growth in the US and China may crimp euro-area exports, a mainstay of the recovery so far, and fiscal-austerity measures across Europe may curb domestic spending in the region.

"The inflation rate is closing in on the ECB's comfort zone," said Laurent Bilke, an economist at Nomura International and former ECB forecaster. "Whether the ECB will be worried about it depends entirely on how it thinks the economy will evolve."

Energy prices increased 8.1 per cent in July from a year earlier, today's report showed, compared to a 6.2 per cent gain in the prior month. Core inflation, which excludes energy and other volatile components, accelerated to 1 per cent last month from 0.9 per cent in June.

Oil prices have increased 8 per cent over the past two months just as the euro's recent advance adds pressure on companies to cut prices by making European exports less competitive abroad. The single currency has gained 4 per cent against the dollar in the past two months, paring annual losses to 9 per cent.

The central bank aims to keep annual price gains just below 2 per cent and president Jean-Claude Trichet said he will announce next month how the ECB will scale back its program of unlimited loans to banks, a plan the Frankfurt-based bank implemented in 2008.

Mr Trichet will have to gauge the timing of when to tighten policy. Pulling back too soon could choke off credit and roil markets, while acting too late could stoke inflation.

For now, the economy shows signs of weathering a stronger euro and the Greece-led fiscal crisis. The euro-area economy expanded at the fastest pace in four years in the second quarter, data showed on August 13th.

Adding to signs an export-led recovery is feeding into the wider economy, growth in Europe's services and manufacturing industries accelerated in July and economic confidence rose to the highest in more than two years.

From the prior month, July consumer prices declined 0.3 per cent, today's report showed.

Bloomberg