Soaring Food, Oil Prices Push Euro-Zone Inflation to New High

The relentless rise in euro-zone consumer prices continued in July, as the annual rate of inflation hit a fresh record high. The flash estimate for the annual rate of euro-zone inflation was 4.1% in July, up from 4.0% in June, Eurostat data showed recently. That was just below expectations of 4.2% and could mark the peak for the measure, which has been pushed higher by soaring food and oil prices. The inflation rate now stands at its highest level since Eurostat began collecting data in '97 and is twice as high as the European Central Bank's target of "below, but close to" 2%. A year ago the annual rate of inflation was at 1.8%. Economists said July data could mark the peak of this inflation cycle. An economist at UniCredit Bank said price pressures should begin to moderate already in Aug., but a more decisive deceleration won't occur before the first half of next year. It is clear the ongoing growth stagnation is already taking care of the core components of inflation. An economist at ING Bank said that if the current lower oil prices are sustained, the rate of CPI could fall back below 3% by mid-2009 and that the economic downturn should help bring inflation back towards the 2% target in early '10. At its latest meeting, the ECB raised its key interest rate to 4.25% from 4.00% in a bid to tame inflationary pressures in the currency bloc. The central bank is concerned the current rate of inflation will prompt workers in the euro zone to push for fatter wage packets, which in turn can push prices even higher. The ECB faces the difficult task of balancing the risk of a wage-price spiral with disinflationary pressures generated by slower euro-zone growth. Most economists think the central bank will leave interest rates on hold for some time before cutting next year to stimulate growth. The recent CPI number is a preliminary estimate and Eurostat doesn't provide a breakdown of which prices are rising most rapidly, but it's likely higher energy price are to blame. Eurostat's breakdown of the July figure will be released and will be closely watched as it will contain a measure of core inflation, which strips out energy prices.