Surging fuel food prices drove euro zone inflation to more than double the European Central Bank's target last month, data confirmed today, and economists expect things to get worse before they get better.
Consumer prices in the 15-country currency area rose 0.4 per cent month-on-month in June, for a 4 per cent year-on-year gain, the European Union's statistics office Eurostat said.
Both figures matched market expectations and the annual rise was the biggest for the zone since measurements started in 1997, confirming Eurostat's estimate from June 30th.
"We continue to expect that inflation will edge higher to about 4.3 per cent over the summer, so in August we are looking for a peak, 4.3 per cent, with again food and energy prices contributing to the pickup," said UBS economist Sunil Kapadia.
The European Central Bank, which wants annual inflation to be just below 2 per cent, raised interest rates by 25 basis points to 4.25 per cent this month to better anchor inflation expectations as prices climb.
But economists expect the bank will have to raise rates once or twice more before inflation is under control as the higher food and fuel prices trigger rises in other sectors and faster wage growth - the so-called second round inflation effects.
"Building evidence of second round effects should keep the ECB's inflation worries very much alive and we expect the central bank to raise interest rates further in the coming months," said Nick Kounis, economist at Fortis.
"We are forecasting that a 25 basis point rise in quarter four, will be followed by an additional one in the first quarter of 2009, taking the minimum bid rate to 4.75 per cent," he said.
Energy prices rocketed 16 per cent year-on-year in June and 2.5 per cent month-on-month, Eurostat said, after oil costs that month rose to then-new highs above $140 per barrel. Oil has become even more expensive in July.
Food prices rose 0.2 per cent on the month and 6.4 per cent year-on-year - the same rate as in May.
Without energy and unprocessed food costs, or what the ECB calls core inflation, prices grew 0.1 per cent month-on-month and 2.5 per cent year-on-year, again the same rate as in May.
Reuters