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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (4075)	6/13/2001 11:14:13 PM
From: John Pitera	Respond to of 33421

European Inflation picks up... the FT speculates that the ECB may difficulty managing for increased growth and lower inflation rates. --------------- Editorial comment: Europe's inflation shock Published: June 12 2001 18:27GMT \| Last Updated: June 12 2001 18:28GMT The saving grace of the global slowdown has, so far, been low inflation. But May's data for Europe's three largest economies showed a large jump in the rate of price increases, prompting concerns that in spite of slowing economic growth, interest rates may soon be on the rise again. In Germany, the annual rate of inflation hit 3.6 per cent on a harmonised basis; in France, which has recently had a good inflation record, the rate unexpectedly increased to 2.5 per cent. Even in the UK, which has the lowest inflation in the European Union, the harmonised index rose to 1.7 per cent in May, up from 1.1 per cent in April. If these figures were the product of excessive demand, or structural problems, they would be deeply worrying. But two factors are almost entirely responsible for the rise: energy and food. As the global economy slowed, it was thought that energy prices would recede from last year's peaks. But uncertainties over Iraq have sent oil prices back up. In many European countries this is now feeding through into large rises in household prices, such as an annual increase of nearly 30 per cent in domestic heating bills in Germany. The other shock was food. Foot-and-mouth disease and BSE, or mad cow disease, may have grabbed the headlines but it is the more mundane problem of the impact of bad weather on fruit and vegetable prices that has really driven up inflation. These effects dominate the price indices. But core measures are also creeping up. The euro-zone's core index, which excludes food, tobacco and energy, is likely to breach the sensitive 2 per cent rate before long. Higher costs in housing, transport and some service industries are to blame. In contrast, prices in the competitive sector of manufactured goods remain subdued. Given the importance of temporary factors, the question is whether rising European inflation is worrying. One concern is that it could further damp growth. Higher inflation depresses real incomes and therefore consumption; renewed rises in energy prices reduce profit margins for companies that cannot pass on the cost increases. Neither the European Central Bank nor the Bank of England is likely to respond to these contractionary influences for fear that what is now a temporary inflation rise could become permanent. Higher headline price rises could become entrenched if they fed through into wage demands. The combination of rising inflation and slowing growth is a difficult one for monetary policymakers. In the case of Europe, though, there is some hope that the upward pressures on prices may ease before central banks are forced to face the dilemma of either supporting flagging growth or controlling inflation. <?i>