EU official warns that inflation can go out of control

Yearly inflation in the 15 countries that share the euro spiked to an estimated 4% in June, the fastest prices have accelerated in the 16 years of keeping records for each nation. This is slowing growth and hurting the economy as shoppers shy away from big purchases and pay more for groceries and transport. EU Economic and Monetary Affairs Commissioner Joaquin Almunia warned employers and workers to take care not to worsen the situation by allowing large pay increases _ or “second-round effects” that could see inflation spiral out of control. “The present inflationary shock is very strong and if we add on top of this ... inflationary pressures through second-round effects, the situation can be extremely difficult. It’s a matter of deep concern,” he said Monday after talks with euro finance ministers.

These price spirals are already happening in parts of the euro area that he would not name, he said, claiming that this is not yet a serious problem. “Some second-round effects can be perceived in some members of the euro area but still (they are) more a risk than evidence,” he told reporters after talks with euro finance ministers. “We should avoid that these risks ... will materialize in the coming months.” He also cautioned governments not to fuel further price hikes with indirect taxes. Almunia said a third of the current inflation surge can be blamed on rocketing energy prices, another third on higher food prices which he said was "strongly affected" by increasing energy prices. Another third could be blamed on rising consumer prices in sectors such as services that face little competition, he said.

Luxembourg Prime Minister Jean-Claude Juncker, who led the talks .. said euro finance ministers expect oil prices to remain at “a very high level” over the next few months but did not want this to justify wage increases or lower fuel taxes that would not curb oil consumption. Juncker said euro nations supported the European Central Bank’s move to cool inflation by hiking borrowing costs for the first time in a year from 4% to 4.25% last year even though this may tighten credit and worsen the slowdown. “We all felt that the European Central Bank is quite right to stress the need to anchor inflation expectations in the medium term in the forthright way it has done so far,” he said, adding that he personally did not see the hike as the start of a series of increases.

Talks continue Tuesday between all 27 European Union finance ministers who will look at ways to make the oil market more transparent including by publishing stock levels weekly instead of monthly They will also urge more energy efficiency and the use of a wider range of fuels. France, currently the holder of the EU’s six-month rotating presidency, will come back with more ideas in October on how to tackle soaring energy prices.

Ministers are expected to give the final word to Slovakia to become the 16th member of the euro-zone next January and fix the exchange rate for swapping the koruna for euros. Slovakia has been pushing for a higher rate to try and calm rising inflation but may find it difficult to win the support of other EU nations for this as it has already revalued its currency upward twice over the past year and a half.

The EU’s executive arm will seek EU governments’ support for its plan to put forward rules in October to oversee the credit rating agencies that judge the risk of debt sold by banks. The three major rating agencies Standard & Poor’s Corp., Moody’s Investors Service Inc. and Fitch Ratings are based in the United States. EU Financial Services Commissioner Charlie McCreevy said last week that the EU needed to drive forward regulation in this area because neither international regulators nor the financial industry had managed to come up with strong solutions.

EU nations will also formally clear Poland of breaking EU budget rules because it last year cut its yearly budget deficit beneath the EU ceiling of 3% of gross domestic product. They will also likely reprimand Britain as it looks like it will exceed that limit in this fiscal year. (Economic Times)