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Eurozone struggles to cope with ‘inflation spiral’ PDF Print E-mail
Thursday, 03 April 2008

Consumer prices in the 15 nations sharing the euro surged in March to the highest level since the bloc was formed in 1999, official data showed yesterday, fuelling concerns of an “inflation spiral,” reports AFP

Soaring consumer prices, which came on top of slumping economic confidence, further complicates the European Central Bank’s task of holding a lid on inflation while trying to keep the eurozone economy from falling into a rut.

The ECB’s quest to quell inflation will be all the more challenging because European trade unions are in the midst of a drive for broad pay hikes aimed at supporting workers’ declining purchasing power.

The European Union’s Eurostat data agency said in a first estimate that 12-month inflation in the eurozone jumped to 3.5 percent in March, up from 3.3 percent in February and slightly above economists’ forecasts for 3.4 percent. The figure, which came amid record oil prices of around 110 dollars a barrel, was far above the European Central Bank’s comfort zone of just under 2.0 percent.

“The latest eurozone data further deepen the ECB’s dilemma between high and rising inflation on the one hand and slowing activity on the other,” said economist Jennifer McKeown at consultants Capital Economics. Describing the March rate as “not a good figure,” commission spokeswoman for economic matters Amelia Torres said: “We have to avoid second-round effects, that is to say an inflationary spiral.”

She added that workers should keep their demands for wage increases “in line with productivity gains in order to maintain the competitiveness of the eurozone.” But with soaring inflation nibbling away at their members’ purchasing power, unions are in no mood for restraint in their wage demands, according to John Monks, general secretary of the ETUC, an umbrella group for European trade unions.

“Our view is, if pay restraint is necessary the calls should be directed to the boards of directors and the other senior managers who have been paying themselves huge increases in recent years,” he told AFP in an interview. On Saturday, about 40,000 European union members are planning a march on Ljublana, Slovenia’s capital, to press for bigger pay increases as EU finance ministers and central bankers meet nearby.

“The need for European purchasing power and the real wages of European workers to increase can give extra demand and a bit more buoyancy to the European economy,” Monks said. “Always relying on exports to the USA or to some other place I think is not the recipe for our economic future,” he added.

The record inflation came as confidence in the eurozone economy fell more than expected in March, hitting the lowest level in nearly two and a half years, according to a survey from the European Commission.

Its economic sentiment indicator for the eurozone fell to 99.6 points in March from 100.2 in February, hitting the lowest level since November 2005 and falling short of economists’ forecasts for 99.9 points. The European Union’s executive arm blamed the bleaker outlook on weaker confidence in the services and construction sector while consumer confidence held steady.

“This heightens concern about the strength of eurozone domestic demand going forward, while exports are coming under increasing pressure from a deteriorating global economic environment and a record high euro,” said economist Howard Archer at consultants Global Insight.

Despite the darker eurozone outlook, the commission said that its separate business climate indicator for the bloc improved in March, rising to 0.80 points from 0.71 in February and halting a three-month decline. “The relatively high level of the indicator points to sustained industrial production growth in the first quarter of this year,” the commission said.

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