Europe inflation under 2% limit, but labour costs up 2.4%
Inflation in the euro area remained below the European Central Bank’s 2% ceiling for a sixth month in February as fuel prices declined.
By Agencies |
LISBON: Inflation in the euro area remained below the European Central Bank’s 2% ceiling for a sixth month in February as fuel prices declined. Consumer prices in the euro area rose 1.8% from a year earlier, the same pace as in January, the European Union’s statistics office in Luxembourg said.
Prices increased 0.3% from January. Labour costs rose a higher-than-expected 2.4% in the fourth quarter, according to a separate report. While a 24% drop in oil prices from a July record has helped keep inflation below the ECB’s 2% limit, the central bank is concerned price increases will accelerate as the economy’s expansion gives companies more scope to raise prices and encourages workers to seek higher wages.
The ECB has signalled it will raise interest rates further in coming months. “The message they’re trying to send is that even though headline inflation might fall more, that’s no reason to expect the ECB not to raise rates again,” said Nick Matthews, an economist at Barclays Capital in London. “The concern at the ECB level is quite high about wages and how they might be influencing inflation.”
Faster-than-expected economic growth in the euro area is pushing unemployment lower and giving workers more power to ask for wage increases. The European Commission on February 16 raised its 2007 growth forecast for the euro area to 2.4% from the 2.1% expansion predicted in November.
With euro-area unemployment at the lowest since records for the figure began in 1993, German unions are demanding pay increases of 6.5%. IG Metall, Germany’s biggest labour union, wants to get its members a bigger raise than the 3.6% won by chemical workers in Europe’s biggest economy last week, a union official said March 12.
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Labour costs in the third quarter rose a revised 2.5% from a year earlier, compared with the original report of a 2% increase in that period. The economic growth is boosting the amount of production capacity being used by European companies and adding to the ECB’s concern that inflation will accelerate later this year. “Capacity use in the economy is increasing and the output gap is starting to close over the forecast horizon,” Axel Weber, president of Germany’s Bundesbank and a member of the ECB’s governing council, said March 13. “That could act as a price risk and lead to stronger domestic price pressures.”
The possibility of a renewed increase in oil prices also is a cause for concern at the ECB, Mr Weber said. The central bank has raised its benchmark rate seven times since late 2005 as economic growth accelerated and the cost of oil rose, the latest rise a quarter-point increase to 3.75% on March 8.
Investors have raised bets on higher ECB rates. The implied rate on the three-month Euribor futures contract for September rose to 4.11% today from 4.04% on March 1. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB’s benchmark rate since the single currency’s start in 1999.
The price of oil has dropped by nearly a quarter since the July record of $78.40 a barrel, trading today at $58.40. The price of transport fuel fell 0.22% in February from a year earlier, the biggest downward impact on the price index, according to today’s inflation report.
“We’ve seen a strong drop in the price of oil,” said Christoph Weil, an economist at Commerzbank in Frankfurt, who expects inflation to be below 2% for the next two years. “We expect oil prices to fall to $50 by the end of this year and to stay there next year.”
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