Inflation figures stoke eurozone rate-rise fears

Inflation in the booming Irish economy surged to a 15-year high last month as the recent jump in oil prices sent prices rising in all 11 of the European single currency countries. Eurozone inflation rose to 2.4 per cent in June from 1.9 per cent in May and ahead of forecasts of between 2.1 and 2.3 per cent. The unexpected leap fuelled fears of further rises in interest rates.

Inflation in the booming Irish economy surged to a 15-year high last month as the recent jump in oil prices sent prices rising in all 11 of the European single currency countries. Eurozone inflation rose to 2.4 per cent in June from 1.9 per cent in May and ahead of forecasts of between 2.1 and 2.3 per cent. The unexpected leap fuelled fears of further rises in interest rates.

Ten of the 11 countries now have an inflation rate above the 2 per cent that the European Central Bank believes is consistent with its definition of price stability. The exception is France with 1.9 per cent.

Top of the league was Ireland, where inflation shot up from 5.1 to 5.4 per cent, its highest level since August 1985. On the standardised European measure inflation is now at 5.4 per cent, or more than double the average for the zone. The euroland figures showed that the biggest impact came from energy costs in the wake of the rise in crude oil to more than $30 a barrel. Energy costs rose 14.7 per cent on a year ago compared with just 1.2 per cent in June 1999.

However, economists focused on a rise in the core measure of inflation, which excludes volatile components such as food, beverages, tobacco and energy. This rate rose to 1.3 from 1.1 per cent.

A spokesman for the European Commission told the daily news conference: "This demonstrates the negative impact of persistent oil prices. It's the first time that we see this energy component starting to have an effect on the core inflation rate."

Gwyn Hacche, an economist at HSBC in London, said the data made it "pretty well definite" the ECB would raise rates in the next couple of months.

The ECB meets to set rates tomorrow but economists were virtually unanimous that rates would stay on hold. Alison Cottrell, chief economist at Painewebber International, said: "It would have been nicer if this hadn't happened but the ECB has expended much energy saying it knows oil is going up and that there will not be a mechanistic response."

The ECB was criticised by the Organisation for Economic Co-operation and Development for sending out confusing policy signals. "Occasional financial market confusion about policy signals from the ECB did not contribute to a strong euro," the OECD said in a regular report.It also said massive capital flows out of the eurozone into the US had played a role in the euro's slide against the dollar.

In Dublin, Irish trades unions seized on the figures to press their claim for a review of a new national wage deal agreed earlier this year. However, the finance minister, Charlie McCreevy, rejected the call and said higher wages would create an inflationary spiral.

Meanwhile, inflation jumped in the US last month as sharply higher energy costs eclipsed a decline in the price of clothes, new cars and education. The consumer price index rose 0.6 per cent last month after a 0.1 per cent increase in May. Excluding food and energy costs, prices rose 0.2 per cent, matching May's gain and in line with forecasts.