Thursday, September 14, 2006

Eurozone Inflation

Oil, as is well known has been generally dropping in recent days, and are now somewhere around the lowest prices seen since last March. It is hard to know how much of the correction is due to the fact that it was previously over-valued, how much is due to the anticipation of a developing slowdown, and how much simply reflects relief that there were no serious hurricanes this year.

In any event the drift is down, although the thing which could upset the whole apple cart is an 'up the anti' in the argument about Iran's nuclear programme.

So it is hardly surprising to find that inflation in Eurozone countries is also taming somewhat. According to German the Federal Statistics Office in August German consumer prices rose 1.8 percent from a year earlier after increasing 2.1 percent in July. In France, the annual inflation rate in August fell to 2.1 percent after increasing 2.2 percent in July, according to the national statistics office Insee.

What I would say is that if oil prices hold either steady or drift down then we are unlikely to see any significant upsurge in inflation here in europe, especially with a high euro, and record imports fromChina. Which puts the ECB in a rather embarassing situation.

Certainly I think the idea of a surge in passing on costs is very unlikely, internal demand (even in France) just isn't sufficiently robust, so I think this argument is a mistake:

Euro-region inflation may accelerate in coming months as faster economic growth gives companies room to pass on rising costs and workers leeway to seek more pay. At least four European Central Bank council members signaled in the past week that interest rates may keep rising into 2007 to counter higher prices.

``Temporarily, we'll see an easing of inflation because of oil prices,'' said Rainer Guntermann, an economist at Dresdner Kleinwort in Frankfurt. ``The ECB realizes only too well that higher inflation rates need to be expected again next year. It's under pressure to continue normalizing interest rates.''

And on the central banking front, will they be embarassed at the end of the day if all this turns out to be completely off the mark:

ECB council member Nicholas Garganas said in an interview in Basel, Switzerland, on Sept. 11 that there's ``no evidence'' of easing inflation pressures with more signs of a ``greater pass- through of past oil price increases.'' His German counterpart Axel Weber said Sept. 5 that ``no decision has been taken to end the process of normalization at the end of the year.''

``Obviously we are very worried'' that inflation is no longer expected to slow in 2007 on average,'' Garganas said. ``That is why we are strongly vigilant.''

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