Eurozone Inflation Highest for 16 Years
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Eurozone inflation measured 3.7% year-on-year in May, the highest rate for 16 years, reports Bloomberg. This increases the likelihood of an interest rate hike by the ECB in July, putting more downward pressure on the US dollar.
Money Morning’s William Patalon III discusses how rising inflation is dominating the news on both sides of the Atlantic:
Undoubtedly, a universal theme is emerging at the Fed and other world central banks: Inflation, Inflation, Inflation.
And, on that note, most Fed-watchers believe that the next move in rates will be higher. Last week, Fed Chairman Ben S. Bernanke reiterated his concerns about price pressures and many of his partners in crime followed in step by towing the company line. Dallas Fed President Richard Fisher and his counterpart in New York, Tim Geithner, promoted the prospects (rather realities) of rising energy costs and the declining dollar as major concerns. Boston Fed President Eric Rosengren echoed the sentiment by stating that higher energy prices were “trickling through the economy.”
Philly Bank President Charles Plosser went so far as to predict that the Fed would have no choice but to raise rates to combat inflation. Even the Fed’s Beige Book reported that the domestic economy remained sluggish through May, and has been “pinched by rising food and energy prices.” On the global front, European Central Bank President Jean-Claude Trichet targeted July as a date the ECB would look to hike rates should inflationary pressures continue.
Meanwhile, the Bank of Canada held off on a much anticipated rate cut because of - what else - higher energy costs.
For now, however, the recent data showed that inflation (outside of food and energy) remained well-contained as the core CPI climbed by a modest 0.2% in May. (WE have warned you about looking only at the “non-core” figures).
By the way, the CPI, as a whole (including food and energy), experienced its largest one-month-rise in six months. Consumer activity offered perhaps the most promising news of the week as May retail sales surged by 1% as many Americans took those government rebate checks from the stimulus package directly to the malls. Even after removing gasoline sales from the equation, the retail data still experienced its best showing in a year.