Eurozone inflation jumps, ECB seen unmoved

Eurozone inflation jumped more than expected in January to further above the European Central Bank's target, but the bank seems more likely for now to step up its rhetoric on price pressures than raise interest rates. Inflation in the 17 countries using the euro rose 2.4 percent year-on-year, the European Union's statistics office Eurostat estimated on Monday, holding above the ECB's target of just below 2 percent for the second month running after a 2.2 percent rise in December.
Inflation highest since October 2008, well above ECB target January's rate was the highest since October 2008, when it was 3.2 percent. Economists polled by Reuters had expected 2.3 percent. While analysts have attributed the rising price pressures mainly to increases in non-core energy costs, the data boosted the euro against the dollar as it kept alive the view that interest rates in the eurozone may rise sooner than previously thought.
The ECB, which aims to keep inflation below but close to 2 percent, next meets on interest rates on Thursday, when it will also face the problem of how to respond to stark discrepancies between the pace of recovery in different eurozone states. "While the ECB will be far from happy to see eurozone consumer price inflation move further above target, it is still highly unlikely to prompt the bank into action at its February policy meeting," said Howard Archer, economist at IHS Global Insight.
"It will probably step up its anti-inflation rhetoric and stress that it is prepared to hike interest rates despite growth risks if the current spike-up ... shows any significant sign of leading to a significant pick-up in second round inflationary effects, such as rising wage settlements." Any wage pressures would be most likely to emerge in Europe's growth engine Germany, where the IG Metall union has demanded hikes of 6 percent for workers at carmaker Volkswagen and last week rejected an offer of 2.9 percent.
BNP Paribas economist Clemente de Lucia said oil prices were probably the main factor behind the January number, having risen more than 3 euros per barrel in one month and almost 37 percent year-on-year. De Lucia said food prices were probably stable in January, but core inflation, which excludes food and energy prices, probably increased to 1.2 percent from 1.1 percent.
In its quarterly bulletin published on Monday in Dublin, the Irish central bank said there was little evidence that high commodity prices were affecting food prices in the eurozone. No monthly figure or breakdown of the year-on-year estimate was available from Eurostat, and full inflation data for January will be released on February 28.
The ECB has said it expected prices to grow faster than its target in the coming months, peaking at 2.4 percent in March and then subsiding. ECB Governing Council member Ewald Nowotny said last Tuesday he did not expect a decision to raise interest rates in the first half of the year.
But economists noted the bank's monetary policy choices were becoming more difficult because of the difference in growth rates, and therefore inflationary pressures, between countries like Germany and strugglers on the eurozone periphery such as Greece, Ireland and Spain. "Clearly, setting a common monetary policy for divergent economies will not be an easy task for the ECB," de Lucia said.