Inflation on rise in Europe and US [FT]
By Chris Giles in London and Gerrit Wiesmann in Frankfurt
Published: June 27 2008 19:30 | Last updated: June 27 2008 19:30
The world’s two largest economic blocs were both hit on Friday by signs of high inflation and weakening consumer sentiment, adding to the dilemmas faced by the Federal Reserve and the European Central Bank.
Fears that inflation in the eurozone?would?hit?4?per cent in June were stoked by preliminary data from Germany and Spain showing inflation at its highest level for 15 and 11 years respectively.
In the US, the personal consumption deflator rose 0.4 per cent in May, the highest monthly rise since last November, as it was boosted by large increases in energy and food prices.
At the same time, consumers are increasingly feeling the pinch and feel less confident about the future. The University of Michigan consumer sentiment index showed US consumers at their most pessimistic since early 1980, with the reading of 56.4 again down in June from the level of 59.8 in May.
Signs that growth is already slowing in the eurozone also came yesterday morning when the European Commission reported a monthly drop in its sentiment index from 97.6 to 94.9 this month, the lowest since May 2005.
The level of the decline caught economists off guard, even though it came only four days after indices tracking the mood of European purchasing managers and German business showed wider-than-expected losses.
In the US, consumers were still spending happily in May, as their disposable incomes jumped 5.7 per cent in the month after being boosted by government tax rebate payments designed to stimulate the economy.
Much of the money was saved, but spending still rose 0.8 per cent in the month. Michelle Meyer of Lehman Brothers said:
“The rebate will act as a shot of caffeine, boosting growth in the third quarter, but pushing growth into negative territory in the fourth when the caffeine kick fades.”
None of the data made life any easier for central bankers who were considering whether they needed to address inflation concerns or fears of a sharp slowdown later in the year.
Eoin O’Callaghan at BNP Paribas in London said in a note that there was now a “reasonable chance” the preliminary eurozone inflation numbers due on Monday would show prices increasing at an annual 4 per cent.
But Marco Valli at UniCredit in Milan said the current level of the European sentiment index was equivalent to 0.3 per cent quarterly gross domestic product growth, down from 0.8 per cent growth from January to March.
“GDP is decelerating significantly below potential, with increasing signs that weakness is becoming broad based,” Mr Valli warned in a note to clients. “We think this is the start of a prolonged cyclical downturn.”
The ECB is still expected to raise interest rates by a quarter point to 4.25 per cent on Thursday – a move to fight inflation that will drag on growth.
The Fed is expected to hold fire on rates for longer, although there is an expectation still of higher rates in the autumn. |
