Euro zone Jan inflation jumps, ECB unmoved

BRUSSELS - Euro zone consumer prices jumped more than expected in January, rising well above the European Central Bank’s target, but the bank seems more likely to step up its inflation rhetoric than raise interest rates for now.

Inflation in the 17 countries using the euro rose 2.4 percent year-on-year in January after a 2.2 percent rise in December, the European Union’s statistics office Eurostat estimated on Monday.

This is the highest level of inflation since October 2008, when it was 3.2 percent . Economists polled by Reuters had expected a 2.3 percent rise.

The ECB, which aims to keep inflation below, but close to 2 percent, next meets on interest rates on Thursday, when it will also face the problem of how to respond to stark discrepancies between the pace of recovery in different euro zone states.

“While the ECB will be far from happy to see euro zone consumer price inflation move further above target..., it is still highly unlikely to prompt the bank into action at its February policy meeting,” said Howard Archer, economist at IHS Global Insight.

“It will probably step up its anti-inflation rhetoric and stress that it is prepared to hike interest rates despite growth risks if the current spike-up in euro zone consumer price inflation shows any significant sign of leading to a significant pick-up in second round inflationary effects, such as rising wage settlements.”

No monthly figure or breakdown of the year-on-year estimate was available from Eurostat, but economists have attributed higher inflation mainly to more expensive energy.

BNP Paribas economist Clemente de Lucia said oil prices were probably the main factor behind the higher inflation in January because in one month they rose by more than 3 euros per barrel and were up by almost 20 euros against January 2010, which meant an almost 37 percent year-on-year increase.

De Lucia said food prices were probably stable in January, but core inflation, which excludes food and energy prices, probably increased to 1.2 percent from 1.1 percent.

Full inflation data for January will be released on February 28, Eurostat said.

The ECB has said it expected prices to grow faster than its target in the coming months, peaking at 2.4 percent in March and then subsiding.

ECB Governing Council member Ewald Nowotny said last Tuesday he did not expect a decision to raise interest rates in the first half of the year.

But economists noted the bank’s monetary policy choices were becoming more difficult because of the difference in growth rates, and therefore inflationary pressures, between countries like Germany and strugglers on the euro zone periphery such as Greece, Ireland and Spain. “Clearly, setting a common monetary policy for divergent economies will not be an easy task for the ECB,” de Lucia said.

“The peripheral countries are facing serious deflationary risks. By contrast, the output gap is closing in Germany, where the unemployment rate is already below the pre-crisis level. Therefore, some upward pressures are likely in Germany,” de Lucia said.

Economists said the central bank would not raise rates anytime soon, but would probably step up its rhetoric.

“ECB President Jean-Claude Trichet will probably again sound hawkish at Thursday’s press conference,” said Nick Kounis, economist at ABN Amro.

“Although, given high unemployment and elevated economic slack more generally, the risk of second-round (inflation) effects seems low, Mr Trichet can have a dampening effect on inflation expectations by sounding tough,” he said.