European inflation quickens, increasing pressure on ECB

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LONDON, Mar 1 (Bloomberg): European inflation accelerated in February, increasing pressure on the European Central Bank (ECB) to raise interest rates later this year. Inflation in the 17-nation euro region quickened to 2.4 per cent from 2.3 per cent in January, the European Union's statistics office in Luxembourg said Tuesday in a preliminary estimate. That's the fastest since October 2008 and the third straight month inflation has exceeded the ECB's 2 per cent limit. Economists expected a reading of 2.4 per cent, according to the median of 31 estimates in a Bloomberg News survey. ECB officials have toughened their inflation-fighting rhetoric over the past two weeks, indicating they're moving closer to raising rates from a record low even as Europe grapples with a sovereign debt crisis. Policy makers are concerned companies will raise prices and workers will demand higher wages to compensate for surging oil and food costs, entrenching faster inflation. "The ECB is getting really worried about inflation now," said Nick Matthews, senior European economist at Royal Bank of Scotland Group Plc in London. "The policy rate is extremely low, price pressures are building and the economy is doing a lot better." Investors are betting the ECB will raise its benchmark rate from 1 per cent, where it has been since May 2009, in September, EONIA forward contracts show. Policy makers next meet to discuss rates on March 3, when the central bank will also publish new inflation and growth forecasts. The ECB may raise its 2011 inflation forecast to more than 2 per cent from 1.8 per cent and say risks to the outlook now lie to the "upside," council member Yves Mersch said in an interview published on Feb. 22. It may also indicate that the economic outlook has improved, he said. Euro-area unemployment fell to 9.9 per cent in January from 10 per cent in December, the statistics office said in a separate report Tuesday. The European Commission today raised its growth and inflation estimates for 2011. It expects the economy to expand 1.6 per cent this year, up from 1.5 per cent previously, and said higher oil and commodity prices will see inflation average 2.2 per cent. That's up from a November projection of 1.8 per cent. "Risks to inflation seem somewhat tilted to the upside, on account of ongoing geopolitical tensions," the commission said. Crude oil prices have gained 32 per cent in the past six months to $97.37 a barrel today. Unrest in the Middle East and North Africa helped to push prices up 14 per cent last week alone. In Germany, Europe's largest economy, inflation accelerated to 2.2 per cent in February, while in Spain the rate jumped to 3.4 per cent. As the economy gathers strength and prices increase, workers are demanding higher wages to compensate. German train drivers are already holding warning strikes to push through a demand for a 5 per cent pay increase. Volkswagen AG, Germany's biggest automotive employer, agreed this month to boost workers' compensation in the western part of the country by 3.2 per cent to avert strikes as orders surge. Germany's chemical workers union has demanded up to 7 per cent more pay and construction workers are seeking 5.9 per cent more. ECB Executive Board member Juergen Stark said last week that the ECB is "prepared to act decisively and immediately if needed" to maintain price stability, and fellow board member Lorenzo Bini Smaghi said the bank may need to reassess its policy stance. Euro-area core inflation, which excludes volatile costs such as energy prices, held at 1.1 per cent in January, the statistics office said yesterday. A breakdown of February consumer prices will be released later this month.