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ECB fails to hit inflation target

The European Central Bank failed last year to hit its inflation target for the seventh year running, according to official statistics released on Wednesday, in spite of a clear improvement in the final five months of 2006.

Soaring oil prices, especially at the start of the year, meant eurozone inflation was 2.2% in 2006, unchanged from the previous year, according to Eurostat, the European Union’s statistical office. The ECB aims to keep inflation within a range „below but close” to 2%. Since the launch of the euro in 1999, the ECB has persistently missed its target by a narrow margin – to its obvious frustration. Jűrgen Stark, ECB executive board member, admitted in a speech late on Tuesday that he was „not happy” with the ECB’s inflation record. ECB worries about the inflation outlook are expected to lead to at least one more interest rate increase in coming months.

The bank fears strong economic growth will encourage inflationary wage settlements, and worries about the impact on prices of growth credit growth. The ECB’s main interest rate has been raised six times by a quarter percentage point since December 2005, reaching 3.5% last month. However, eurozone inflation has recently returned to within the ECB’s target range. The annual rate in December remained at 1.9%, Eurostat confirmed on Wednesday, and lower energy prices are likely to have kept inflation in check at the start of 2007. January’s rate may also be less than 2%, according to several economists, with a three percentage point rise in German VAT at the start of the year having less of an impact than had been feared.

The latest ECB forecasts are for overall inflation in 2007 to be within a range with a mid-point of 2.0%, suggesting the bank might once again miss its target. But for 2008, the ECB sees inflation in a range with amid point of 1.9%. Details of the latest Eurostat inflation figures, show the „core” rate, excluding volatile energy and unprocessed foods, steady at 1.6% in December, only a fraction higher than its average in 2006. That suggested underlying inflation pressures remained under control, despite the ECB’s concerns. German retailers showed scant sign of having passed on the VAT rise in December, when the country’s inflation rate dipped slightly, from 1.5% in November, to 1.4%. (