European Inflation

Eurostat issued a flash indicator last Friday to the effect that eurozone inflation has fallen unexpectedly from 1.9% to 1.6%. I say unexpectedly, but of course this is, in many ways, one of the foreseeable consequences of the euro rise.

For many this will undoubtedly be good news. The important point to bear in mind, however, is that this number is an average for the entire eurozone, so while there will be those whose inflation is significantly above the figure, there will also be those significantly below. One thinks immediately of Germany here. Of course this is only a ’flash’ estimate, we await confirmation, and a detailed breakdown. But could it be that German inflation is begining to hover dangerously close to that 0% watermark? This latest data will undoubtedly raise the pressure on the ECB to lower interest rates when it meets later this week. However the decision is far from being a foregone conclusion. There are still a wide variety of views available - one for every taste and preference - on which way the eurozone economy is headed, and on which is the greatest present threat and danger, inflation or its converse: deflation.

Also please note that on Thursday US Federal reserve governor Bernanke was saying that US inflation was “under very good control”. He, at least, has his priorities clear.<

Hopes of a cut in European interest rates next week to relieve the pain inflicted by the strong euro rose yesterday after official figures showed inflation on the Continent dropped to a four-year low this month.

The euro fell on the news, which was compounded by an unexpected upward revision to the latest US growth figures that boosted hopes of a sustainable economic revival for the world’s largest economy.

Eurostat, the European Union’s statistics agency, said its “flash” estimate of inflation in the 12-nation area slid unexpectedly to 1.6 per cent, the lowest since November 1999 and well below the European Central Bank’s 2.0 per cent target.

Jean-Pierre Raffarin, the French prime minister and Gerhard Schroder, the German chancellor, added to pressure on the ECB by calling for a rate cut to stem the euro’s 14 per cent advance against the dollar in the past six months.

Robert Prior, a European economist at HSBC, said: “This will lead to further speculation that the ECB will cut interest rates, possibly as early as next week.”

But he said that although recent economic data had been weak - GDP slowed to 0.3 per cent - the euro’s recent fall would probably encourage the ECB to delay any rate cut until further evidence came in.

Martin Essex, senior economist at Capital Economics, said a rate cut next week could not be ruled out but added: “We believe the ECB will wait until later in the year by which time inflation will have fallen further and the impact of the euro will have become clearer.”

The euro fell as low as $1.2374 and has now lost more than five cents from last week’s record high of $1.2930.

Separate figures showed the US economy rose at a 4.1 per cent annual rate in the fourth quarter of 2003, just above the 4 per cent gain initially reported a month ago.

Taken together with the third quarter’s meteoric 8.2 per cent surge, growth in the second half of the year was the strongest back-to-back quarters since the first half of 1984.

Business spending on equipment and software was more robust than first thought, firms added to inventories at a faster pace and exports were stronger.

On Wall Street, the Dow Jones rose 3.78 to 10,583.92. Falling back from an earlier rally of stocks, which had been buoyed by a report on industrial production in Japan, which sent the Nikkei 225 to its biggest gain in more than two months.

However analysts said the strong GDP number was unlikely to force the hand of the Federal Reserve to raise interest rates in light of comments on Thursday by Ben Bernanke, a Fed governor, who said inflation was “under very good control”.

Later figures yesterday showed US consumer confidence declined this month, while an index of mid-West manufacturing slipped.
Source: The Independent