Inflation biggest threat, warns EU commission

INFLATION is one of the major threats to the EU economy and governments need to control anything that could contribute to rising costs, including wage increases and prices, the European Commission has warned.

Where Ireland is concerned, the slowdown in the housing market and domestic house construction will continue to dog the economy well into next year, the spring economic forecast said.

Predictions for growth in the EU were cut again for this year to 2% (1.7% euro area) and will be even lower in 2009 at 1.8% (1.5% euro area), according to the Economic and Monetary Affairs Commissioner, Joaquim Almunia.

He blamed the downturn on the US economy, where growth is expected to be negative before it begins to recover in the second quarter of 2009; soaring commodity prices (including oil and food), and the persistent turmoil on the financial markets that is leading to tightening credit conditions, especially for domestic and corporate borrowers.

Inflation is now a major problem, Mr Almunia warned, and is expected to surge briefly to 3.6% (3.2% euro area and 4.2% for Ireland) this year, mainly due to soaring energy and food prices, before dropping to 2.4% (2.2% in euro area and Ireland) next year.

Governments needed to be particularly wary about public spending and wage rises to avoid an inflation spiral, that would especially affect low-income families, he said.