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Europe inflation holds below ECB limit for 4th month

Inflation in the euro area held below the European Central Bank's 2% ceiling in December for a fourth month as energy prices declined and the euro rose.

Consumer prices increased 1.9% from a year earlier, the same rate of inflation as in November, Eurostat, the European Union's statistics office in Luxembourg, said today. A separate report showed that expansion in Europe's service industries, the biggest part of the economy, unexpectedly slowed in December, a sign economic growth may have peaked. Easing energy costs are helping European economies keep price increases under control, while the euro's advance against the dollar reduces the cost of imports.
Still, with money-supply growth at a 16-year high and Germany increasing a sales tax this month, the ECB has warned of inflation risks, suggesting it will add to its six interest-rate increases since December 2005. Inflation below 2% „will not deter the ECB from raising its key interest rate further,” said Howard Archer, chief European economist at Global Insight Inc. in London. „It believes that medium-term inflation risks still stem from the lagged indirect effects of persistently high oil prices, as well as from excessively strong money-supply and credit growth.” The December inflation rate, which is a preliminary estimate, matched the median forecast of 26 economists in a Bloomberg News survey. The statistics office is scheduled to publish a final figure on January 17.

Oil prices have dropped 25% from a record $78.40 a barrel in July. Crude oil in New York was trading at $58.56 today, having declined in four of the last five months. The euro, which reached a 20-month high of $1.3367 in early December against the dollar, was at $1.3105 today. The ECB last month raised its benchmark interest rate to a five-year high of 3.5% to contain price increases in the euro region.
While the Frankfurt-based central bank forecasts inflation will ease to 2% this year from 2.2% in 2006, it has signaled it may continue to raise borrowing costs this year to counter inflationary risks. M3 money supply, which the ECB uses as a gauge of future inflation, jumped 9.3% in November from a year earlier, the biggest increase since April 1990, after gaining an annual 8.5% in October.

„Our message is very, very clear: We will do whatever is necessary to ensure price stability,” ECB President Jean-Claude Trichet said in a December 20 interview. „We have risks that are on the upside as regards inflation.” The slowdown in services growth follows a January 2 report showing that manufacturing growth in the euro region also eased last month. The bloc is now 13 nations after Slovenia adopted the European currency January 1.
Futures trading shows investors have increased bets the ECB will raise its key rate to 3.75% as soon as March. The yield on the three-month Euribor futures contract for March was at 3.92% today, up from 3.75% on December 4. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB's benchmark rate since the currency's start in 1999. (Bloomberg)