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ANALYSIS: Global inflation jumps as oil price surge fuels rate fears

By Andrew McCathie Apr 15, 2011, 15:07 GMT

Berlin - Global inflation has jumped as surging oil prices fuel interest rate fears amid steep rises in consumer prices in Europe, the US and Asia.

While annual consumer prices in the 17-member eurozone climbed to a 29-month high of 2.7 per cent in March, the US Labor Department said inflation in the world's largest economy also came in at 2.7 per cent after posting its biggest rise since December 2009.

In the meantime, China's National Bureau of Statistics said inflation in the world's second biggest economy soared to a 32-month high of 5.4 per cent year-on-year in March while consumer prices in India unexpectedly rose to 8.9 per cent in March, government data showed.

Analysts had expected the European Union's statistics office Eurostat to confirm a preliminary estimate released earlier this month showing eurozone inflation edging up to an annual 2.6 per cent last month from 2.4 per cent in February. The March rate was the highest since October 2008.

'The latest data are unlikely to reduce the European Central Bank's fears about inflation, suggesting that the bank will probably raise interest rates again before too long,' said Ben May, European economist with the research group Capital Economics.

The renewed global inflationary pressures came in the wake of a pickup in energy costs on the back of unrest across the Arab world along with the world economy's rebound from the 2009 recession. Oil prices have drifted down this week after soaring by about 30 per cent over the last three months.

While annual energy prices in the eurozone jumped by 13 per cent in March, Eurostat said, the US energy index leapt by 15.5 per cent.

'The focus of markets, and of the US Federal Reserve, is slowly but surely moving from deflation to inflation risks,' said ING Bank economist Teunis Brosens.

Rising inflation also risks undercutting consumer spending at a crucial time in the world's economy's recovery from the 2009 recession.

The Reserve Bank of India has raised its key interest rate eight times over the past 15 months in an effort to check inflation.

The bank's repurchase rate now stands at 6.75 per cent with analysts seeing accelerating inflation as strengthening the case for another rate hike possibly next month.

Figures released on Tuesday showed annual inflation in Germany growing at its fastest pace in more than two years in March to rise by 2.1 per cent.

Despite the unexpected drop in annual consumer price inflation in Britain to 4 per cent in March, many economists expect inflationary pressures to remerge as the year unfolds amid higher commodity prices.

With China's economy chalking up a robust 9.7-per-cent growth rate, the pickup in inflation has already started to fuel speculation of another increase in borrowing costs in the country. China has already raised rates four times in less than six months in an attempt to curb inflationary pressures.

The surprise jump in eurozone inflation pushed consumer prices further away from the ECB's target of keeping inflation close to, but below 2 per cent.

As a result, the increase added to pressures on the hawkish ECB to deliver further rate hikes in the coming months.

Many analysts believe that the cost of money in the currency bloc could stand at 1.75 per cent by the end of the year with the next ECB monetary tightening coming as early as June.

The publication of the latest inflation data followed the ECB's decision last week to deliver a 25-basis-point rise in its benchmark refinancing rate.

Announcing the increase in rates to 1.25 per cent last week, ECB chief Jean-Claude Trichet left open the door to further rate increases.

Speaking at his regular press conference following the announcement, Trichet said the bank's rate-setting council had not decided that the rise in the cost of money would be the first in a series of rate hikes.

But he said the ECB was continuing to 'monitor very closely' the threat posed by renewed consumer price pressures.

Markets see these words as ECB code signalling that the bank's governing council might consider further increases in the cost of money to combat rising inflation.

This is despite the threats posed to European economic growth by the re-emergence of the region's debt crisis and the risks that oil prices could spiral further higher.

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