European inflation accelerates to 16-year high

The inflation rate rose to 4.1% from 4% in June, the European Union statistics office in Luxembourg said Wednesday. The rate, the highest since April 1992, matched the median estimate of 36 economists. A separate report showed unemployment remained at 7.3%.

The European Central Bank, which aims to keep inflation just below 2%, raised its key interest rate by a quarter point to 4.25% on July 3, a seven-year high. The risk is that higher borrowing costs will exacerbate the economic slowdown. Europe’s manufacturing and service industries are contracting and confidence in the economic outlook this month plunged the most since the Sept 11 terrorist attacks in 2001.

“The ECB’s hands are tied by the inflation rate and the risk of second-round effects,” said Aurelio Maccario, an economist at Unicredit MIB in Milan. “But barring any further surge in oil prices, there is a good chance that we are seeing the peak.” Crude oil prices have retreated to around $126 a barrel after reaching a record $147.27 on July 11. They’re still up 60% from a year ago, while prices for commodities including steel, corn and wheat have also soared.

The ECB wants to prevent companies passing on higher costs and has urged workers not to seek pay increases to compensate for increased living expenses, saying this may unleash a wage-price spiral. Workers at Deutsche Lufthansa AG, Europe’s second-biggest airline, are striking in pursuit of a 9.8% pay claim.

A European Commission gauge of companies’ selling-price expectations rose to a 13-year high in July and Italian wage growth accelerated to 3.6% in June, the highest in more than three years. “We’ll have to continue to raise prices because of higher raw-material costs,” Juergen Hambrecht, CEO of BASF SE, the world’s largest chemical producer, said yesterday. (China Daily)