(RTTNews) - The Eurozone annual inflation accelerated to a new record high in May, driven by higher food and fuel prices, adding to the dilemma of the central bank that is trying to balance inflationary pressures and slowing growth.

A final report from the Eurostat showed that inflation increased to 3.7% in May from 3.3% in April. The statistical office, thus, revised up its flash estimate of 3.6% for May inflation, released on May 30. Eurozone inflation was widely expected to come in line with the flash estimate. Inflation reached the highest level since the euro was introduced in 1999 and the highest since June 1992.

Annual inflation in the 15-nation economy continues to stay above the European Central Bank target. The central bank aims to keep inflation rates “below, but close to, 2% over the medium term”.

In May, inflation was driven up by 13.7% rise energy costs and 6.4% growth in food prices. Excluding food and energy, core annual inflation stood at 1.7%, up from 1.6% in the prior month.

In May 2008, the lowest annual inflation were observed in the Netherlands, Portugal and Germany and the highest in Latvia, followed by Bulgaria and Lithuania. Compared with the prior month, annual inflation increased in twenty-one Member States, remained stable in three and declined in two.

EU annual inflation for May rose to 3.9% from April’s 3.6%. A year ago, inflation stood at 2.1%. The monthly inflation came in at 0.6% in both Eurozone and in EU.

BNP Paribas’ economist, Clemente De Lucia commented that inflation should continue to increase in the coming months as oil prices are expected to remain high in the near term. The economist said inflation peak at around 4% in summer and the central bank should raise the refi rate at 4.25% in July.

Earlier in the month, the European Central Bank decided to retain the key lending rate at a six-year high of 4%. The ECB President Jean-Claude Trichet had hinted at the possibility of a rate hike next month, saying it is “not excluded” that the central bank may raise interest rates. He said the Governing Council is currently in “a state of heightened alertness” amid high inflation. An above-target inflation rate is preventing the ECB from lowering borrowing costs in the Eurozone, after the U. S. and the UK cut their interest rates.

Lucas Papademos, Vice-President of the European Central Bank said in an interview at Korea “higher-than-expected wage growth may emerge, taking into account high capacity utilisation, tight labor market conditions and the elevated inflation perceptions and expectations of consumers.” Policymakers are concerned that surging oil and food prices may prompt unions to seek bigger pay hikes, adding further to inflationary pressures in what are called “second round effects”.

Growth in the 15 nations following the Euro currency is widely expected to slow sharply in the second quarter. Most economists expect the ECB to hold interest rates unchanged for a prolonged period of time, some even seeing a rate cut only next year, while others does not rule out a rate hike this year.

For comments and feedback: contact editorial@rttnews.com

Copyright(c) 2008 RealTimeTraders.com, Inc. All Rights Reserved

Posted in Categories: Economy, Eurozone, Forex, Releases, Stocks, UK.

Subscribe by RSS Subscribe by Email