Inflation pushes higher in Europe and the U.S. euro rose to another record against the dollar Wednesday amid expectations that central bankers on opposite sides of the Atlantic would react differently.
Inflation pushes higher in Europe and the U.S.
By David Jolly Published: April 16, 2008
PARIS: Inflation showed no signs of slowing in Europe or the United States last month, fresh data revealed, and the euro rose to another record against the dollar Wednesday amid expectations that central bankers on opposite sides of the Atlantic would react differently.
The Labor Department in Washington reported that U.S. consumer prices rose 0.3 percent in March from February, and 4 percent from a year earlier. So-called core inflation, which excludes food and energy, rose 0.2 percent from February.
That report came after Eurostat, the EU statistical agency, said inflation in the 15 countries that use the euro rose 1 percent in March from the previous month, and by a record 3.6 percent from a year earlier. The agency had previously reported March annualized inflation of 3.5 percent, also a record.
Adding to the European Central Bank's inflation worries was the news Wednesday that some 550,000 workers in the German chemical sector had won a pay deal worth 8 percent over two years - the latest in a series of packages in Europe's largest economy.
"The times of wage restraint in Germany are clearly over," said Dirk Schumacher, senior European economist at Goldman Sachs in Frankfurt.
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The euro rose as high as $1.5954 on Tuesday afternoon in New York, from $1.5774 the previous day, beating its previous record of $1.5911.
The inflation data Wednesday are "obviously a concern for the European Central Bank," Lee Hardman, a currency economist at Bank of Tokyo-Mitsubishi UFJ in London, said.
The ECB has set its main policy rate at 4 percent, and is expected to hold it at that level because of rising prices. Yet in the United States, where fears of an imminent recession are strong, the Federal Reserve is seen as likely to cut its benchmark rate, currently at 2.25 percent, yet again, possibly as early as this month.
As a result, investors can earn a higher return by purchasing some European assets than they could with similar U.S. assets.
"The interest rate differential between the euro zone and the U.S. is the primary driver" of the fall of the dollar, Hardman said. The euro also rose to a record against the pound amid expectations that the Bank of England would soon reduce borrowing costs.
Inflation is becoming entrenched in the global economy. Prices in China rose at an annual 8.3 percent rate in March, the government reported Wednesday in Beijing (Page 17), while the governor of the Indian central bank, Yaga Venugopal Reddy, said in an interview on television that inflation was "unacceptably high."
Even in Japan, which just a short time ago was facing the prospect of deflation, core consumer prices are rising at a 1 percent rate, the fastest pace since 1998.
Oil continued on its record path, with May crude oil futures trading Wednesday at $114.23 a barrel on the New York Mercantile Exchange, and rice - a crucial food for about half of the world's population - rising to the highest level ever.
"Food and energy prices are going up on a global scale," said Jörg Krämer, chief economist at Commerzbank in Frankfurt. Both in the United States and in the euro zone, he noted, rising food and energy costs added 1.6 percentage points to March inflation.
While robust demand for basic commodities plays a major part in the price increases, economists say that the U.S. authorities, by lowering interest rates, are in effect printing money to ease the financial market turmoil that followed the collapse of the housing bubble.
Inflation reduces the pain of debt repayments, since loans are paid back with less valuable dollars. More cash on the world market in turn feeds the boom in commodities.
"The dollar's weakness exacerbates inflation," Hardman said, as commodities priced in dollars rise when the U.S. currency falls.
"The Fed is not so interested in inflation, currently," Krämer said. "They have a bigger problem: recession."
"In the short term," he added, "inflation won't be a problem in the U.S. But someday, this crisis will be over," and by that time, inflation expectations could be so thoroughly built into the world economy that the Fed could be forced to take drastic action.
Krämer said he expected the Fed chairman, Ben Bernanke, and his colleagues on the Federal Open Markets Committee to cut the fed funds rate to 1.25 percent by June. In contrast, he said it was unlikely that the ECB would ease monetary policy before early 2009.
ECB officials have expressed concern about the wage deals in Germany this year, with Jean-Claude Trichet , president of the bank, saying it would be a mistake for other countries to seek to imitate the German example, where wage growth has lagged for years. |
