Oil and food price increases push eurozone inflation to 4 per cent

Inflation in the eurozone has reached 4 per cent for the first time in the single currency's history. The "flash" preliminary estimate of price increases for June across the 15-nation single currency area stands at 4 per cent – higher than expected, and up from the 3.7 per cent recorded in May.

Fuelled by higher food and oil prices, inflation across most of continental Europe is at its highest in 16 years (factoring in predecessor national currencies). There is a widespread belief that inflation will exceed 4 per cent later this summer. The ECB's target for inflation is "close to, but just below 2.0 per cent".

The European Central Bank meets this Thursday to set interest rates, and the new inflation figures were taken by many as confirmation that the ECB would raise rates by a quarter percentage point above the 4 per cent level they have been pegged at for a year. Senior ECB officials, including the president, Jean-Claude Trichet, have been hinting for some weeks that a rate rise is imminent.

The ECB, like the Bank of England, has voiced concerns that the current spike in inflation will prove more than temporary, as expectations of higher inflation become embedded, especially in the labour market, and lead to higher pay settlements, thus pushing costs up, competitiveness down and threatening higher unemployment. Data from Eurostat shows a pick-up in eurozone wage growth in the first quarter.

As oil prices probe freshhighs, central banks around the world have been edging towards tightening policy to bolster the credibility of their efforts to contain inflation. "Core" inflation in the eurozone has risen only marginally, from 1.7 to 1.8 per cent, giving some hope to those who believe that any increase in interest rates will be modest and shortlived.

Howard Archer, chief UK and European economist at Global Insight, said: "We believe that 4.25 per cent will mark the peak in eurozone interest rates. We expect markedly weaker eurozone growth, extended tight credit conditions and the strong euro to largely contain and then dilute underlying inflation pressures."