Fears over rising eurozone inflation

Eurozone “core” inflation, excluding energy prices, is on a clear upward path and overtook the headline rate in February, according to official figures on Thursday that will add to the European Central Bank’s worries about long-term inflation trends.

Excluding energy and unprocessed food, inflation in the 13-country region accelerated to an annual rate of 1.9 per cent last month, up from 1.8 per cent in January, reported Eurostat, the European Union’s statistical unit. This latest figure was the highest seen since December 2004.

The data highlighted how headline inflation figures have been flattered by falling oil prices – whereas the opposite was the case for much of last year.

February’s headline rate was on Thursday confirmed at 1.8 per cent, unchanged from January.

Although inflation is in line with the ECB objective of an annual rate “below but close” to 2 per cent, it has continued to push interest rates higher, citing the threat of inflationary pressures in the pipeline. It is likely to see the upward trend in “core” inflation as strengthening the case for further rises in borrowing costs in spite of the risk of a political backlash, especially in France.

The central bank cites inflationary wage deals as a particular danger, a clear reference to crucial negotiations in the German engineering sector.

Last week, the Frankfurt-based bank raised its main rate to 3.75 per cent, the highest for five years, and signalled that a further rise was possible.

Clemente De Lucia, an economist at BNP Paribas in Paris, has predicted that core inflation will accelerate moderately over the coming few months, “reflecting the strength of the economy”, which had increased the pricing power of companies.

In its monthly bulletin on Thursday, the ECB reiterated that headline inflation rates were expected to fall during spring and summer before rising towards the end of the year.

However, its task has been complicated because of the lack of any immediate threat of inflation rising significantly above 2 per cent.

In its latest bulletin, the central bank acknowledged that the impact of a three-percentage point rise in German value added tax at the start of this year “was not fully reflected in prices up to January” and that its impact “was apparently off-set at the euro area level by stronger seasonal discounting than in previous years in several euro area countries”.

In a study of previous years’ inflation data, the ECB argued that heavy seasonal discounting in January last year had been followed by stronger price rises than before.

However, this “did not become evident until some months into the year when the extent of the unwinding of the seasonal discounts became clearer”.

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