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Highlights

European Inflation Accelerates More Than Forecast as Oil Surges

Note the concern over inflation expectations in the text below.
That’s what has turned the Fed as well.

German Retail Sales Unexpectedly Dropped on Inflation
Weber Rules Out Changing ECB’s Current Inflation Goal

While the US economic memory from the depression is unemployment lines, the German memory is wheelbarrows full of money.

Eurozone unemployment is down to about 7% which frightens the inflation hawks, as per the below reports.

Trichet Says Pushing Down Inflation Is ECB’s Biggest Challenge

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Articles

European Inflation Accelerates More Than Forecast as Oil Surges

(Bloomberg) European inflation accelerated faster than economists forecast this month as oil prices jumped to a record, adding to what European Central Bank President Jean-Claude Trichet has called policy makers’ “biggest challenge.”

The inflation rate in the euro area rose to 3.6 percent, matching a 16-year high, from 3.3 percent in April, the European Union statistics office in Luxembourg said in a statement today.

Economists had forecast a 3.5 percent rate, according to the median of 36 estimates in a Bloomberg survey.

The ECB, which aims to keep consumer-price growth below 2 percent, said yesterday there are signs inflation expectations “have been trending up recently” and it’s imperative that they remain contained. The Frankfurt-based bank celebrates its 10th anniversary this weekend, having failed to meet its target for the last eight years.

“There has been a sharp deterioration in the inflation picture,” said Simon Barry, an economist at Ulster Bank in Dublin. “Our base case is the ECB is on hold for now, but the inflation risk has increased and there’s no room for complacency.”

Separate figures published by the statistics office today show that unemployment in the euro area remained at a record low 7.1 percent in April.

Crude Oil
Crude oil prices have doubled in the last 12 months and reached a record $135.09 May 22. Food commodities have also surged in the last year, boosting how much consumers are paying for staples such as bread and milk. Wheat has gained 45 percent in the past year and corn has surged 51 percent.

Soaring prices have led to protests in Europe and companies and consumers expect prices to continue to rise. A European Commission index of manufacturers’ selling price expectations increased this month, while consumers’ outlook for their personal finances deteriorated. Greencore Group Plc, the world’s biggest maker of prepared sandwiches, this week said it’s been passing on cost increases to customers by raising its prices.

In France, fishermen have blockaded ports in the past week to protest against the increase in oil prices, while a group representing bus companies in Ireland said it may have to stop school runs because of the cost of gasoline.

Key Rate
The ECB has kept its key rate at a six-year high of 4 percent to counter inflation even as the economy of the 15 euro nations cools. The central bank is concerned that wages will increase to compensate for the higher cost of living, threatening a wage-price spiral.

“We’re looking at below trend growth” in the euro area, said Barry, the Ulster Bank economist. “But for the ECB to consider cutting, that would require a pretty sharp weakening in the economy and nothing so far is heading that way.”

(snip)

Some companies are raising salaries. German wages increased the most in 12 years in January, the statistics office said last month. Germany’s Ver.di union in March negotiated a settlement for as many as 2.1 million public-sector staff that is worth 8.9 percent over two years.

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Weber Rules Out Changing ECB’s Current Inflation Goal

(Bloomberg) European Central Bank council member Axel Weber said revising the ECB’s definition of price stability would jeopardize the bank’s credibility at a time when fighting inflation is “of the essence.”

“I see no compelling reason why a temporary, albeit protracted, rise in energy and food prices should give rise to a discretionary change in the eurosystem’s stability norm,” Weber said at a conference in Frankfurt today. “It would risk unanchoring inflation expectations at a point in time where their solid anchoring is of the essence.”

The ECB defines price stability as keeping inflation just below 2 percent “over the medium term” and has struggled to meet that goal since taking charge of monetary policy in 1999. While economists including Joachim Fels of Morgan Stanley say the ECB should be open to changing its target, President Jean-Claude Trichet said May 8 he won’t consider it “for one second.”

“The present price hikes are a timely reminder that, when it comes to inflation, complacency is out of place,” said Weber, who is also head of Germany’s Bundesbank. “We cannot rest on our laurels where credibility is concerned.”

`Prepared to Act’
The ECB’s 21-member governing council is scheduled to hold its next assessment on interest rates on June 5.

“Over the past decade, the Eurosystem has shown that — if necessary — it is prepared to act in a firm and timely manner,” Weber said. “We will continue to do so over the next decades in order to maintain price stability.”

Surging energy costs pushed inflation to 3.6 percent in May, the most since 1992, from 3.3 percent in the previous month, the European Union’s statistics office in Luxembourg said today.

Economists forecast a 3.5 percent rate, according to the median of 36 estimates in a Bloomberg survey.

Surging food and oil prices “represent the latest, and arguably the most worrying, disturbance in a series of substantial upside price shocks,” Weber said.

Inflation expectations, as measured by French inflation-indexed bonds, rose to an all-time high of 2.46 percent on May 28 from around 2.1 percent two months ago.

A surge in inflation expectations close to 3 percent for this year “is hardly surprising,” Weber said. “Market participants and the general public are likely to readjust their short-term inflation expectations as soon as they observe inflation returning to a lower level.”

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Trichet Says Pushing Down Inflation Is ECB’s Biggest Challenge

(Bloomberg) European Central Bank President Jean-Claude Trichet said the central bank’s “biggest challenge” is to push inflation just below 2 percent in the medium term, according to an interview with Bild newspaper.

“We have to be careful that current price shocks of food and oil don’t translate into price increases of other goods and exaggerated wage agreements, thus triggering a general inflation and wage wave,” Trichet told the newspaper in the interview published today. Bild translated his remarks into German.

Price stability “is and will always be the most important aim of the ECB,” Trichet told the newspaper. Regarding the global financial turbulence, the ECB continues to be “very alert and ready to act” if needed, he said.

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Germany is the only large member of the euro zone where the measure of economic sentiment remains above its long-term average of 100.0. It rose slightly to 103.0 in May from 102.8 in April.

French economic sentiment in May fell below the 100.0 long-term average for the first time in more than a year, declining to 99.8 from 103.1 a month earlier. Sentiment remains well below average in Italy, Spain and Greece.


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