Euro zone core inflation rise signals higher ECB rates

By @ibtimes on

Energy costs pushed up euro zone inflation in April, but core prices jumped as well, confirming ECB concerns about rising inflationary risks and adding to the case for more interest rate hikes.

The European Union's statistics office Eurostat said on Monday that consumer prices in the 17 countries using the euro rose 0.6 percent month-on-month. It also confirmed its earlier estimate of a 2.8 percent year-on-year rise, up from 2.7 percent in March.

Stripping out volatile energy and unprocessed food costs to get to what the European Central Bank calls core inflation, prices rose 0.5 percent month-on-month and 1.8 percent year-on-year, up from 1.5 percent year-on-year in March and 1.1 percent in February.

The worrying thing is that second-round effects are really taking place and core inflation is going up. This is a clear signal we will get more rate hikes, said Carsten Brzeski, economist at ING bank.

The ECB raised interest rates in April to 1.25 percent from 1.0 percent citing rising inflationary pressures, and economists expect it to raise borrowing costs twice more this year, with the next hike most likely in July.

The ECB wants to keep inflation below but close to 2 percent over the medium term, but economists expect headline inflation to keep climbing from their current levels.

We expect headline inflation to rise further in the coming months. We have euro zone inflation peaking at just above 3 percent in late Q3/early Q4, and have an average of 2.9 percent for 2011, said Eoin O'Callaghan, economist at BNP Paribas.

Eurostat said in April that the price of fuel for transport added 0.56 percentage point to the overall annual inflation rise, heating oil added 0.21 point, electricity 0.12 point and gas 0.09 point.

Food, alcohol and tobacco prices rose 0.2 percent on the month and 2.2 percent year-on-year.

I think the main inflationary pressure so far continues to come from imported price inflation, mainly via commodity prices, said Juergen Michels, economist at Citigroup.

Separately, Eurostat said the euro zone had a bigger than expected external trade surplus of 2.8 billion euros in March against market expectations of a 1.5 billion surplus, even though exports rose 16 percent year-on-year and imports increased 17 percent.

Adjusted for seasonal swings however, the trade balance was a 900 million euro deficit, Eurostat said, with exports rising 1.1 percent month-on-month and imports increasing 0.3 percent month-on-month.

Allowing for the fact that import values were clearly lifted in the first quarter by elevated prices for oil and commodities, the overall impression is that net trade made a decent positive contribution to overall robust euro zone GDP growth of 0.8 percent quarter-on-quarter in the first quarter of 2011, said Howard Archer, economist at IHS Global Insight.

(Reporting by Jan Strupczewski, editing by Rex Merrifield)

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