Inflation rise fuels ECB rate fears

EUROPEAN inflation accelerated more than previously estimated to the fastest in more than two years in March, led by surging energy costs, adding pressure on the European Central Bank to keep raising interest rates.

Inflation in the 17-nation euro region quickened to 2.7% from 2.4% in February, the European Union’s statistics office in Luxembourg said. That’s above an initial March estimate of 2.6% and the fastest since October 2008. Euro-area exports rose 1.6% in February from the previous month, a separate report showed.

The ECB, which aims to keep inflation just below 2%, increased borrowing costs for the first time in almost three years last week to keep increasing price pressures from feeding into wage demands as the economy strengthens. In Germany, unemployment has dropped to the lowest in almost two decades and speciality chemicals maker Lanxess AG boosted prices this month to offset higher raw-material costs.

“The ECB’s fear that an upswing in headline inflation will sooner or later seep through into core inflation is threatening to become reality,” said Peter Vanden Houte, an economist at ING in Brussels. “Two more rate hikes this year are already a done deal.”

Euro-region core inflation accelerated to 1.3% in March from 1% in the previous month, the statistics office said. That is the fastest since August 2009. The cost of energy jumped 13% from a year earlier, while alcohol and tobacco was 3.6% more expensive.

Crude-oil prices have surged 18% this year after unrest in North Africa and the Middle East curbed supplies. In China, inflation quickened in March to the fastest pace since 2008, the statistics bureau said.

European unemployment dropped to the lowest in more than a year in February, giving unions more room to ask for wage increases. Volkswagen, Germany’s largest automotive employer, agreed on February 8 to give 100,000 western German workers a 3.2% pay rise to avert strikes.

Adding to signs of increasing price pressures, German wholesale-price inflation quickened to the fastest in almost three decades last month.

German producer prices jumped 6.4% in February from a year earlier, the biggest gain since October 2008.

The ECB last month forecast inflation to average about 2.3% this year and 1.7% in 2012. Policy makers may raise borrowing costs every three months, taking the benchmark to 1.5% in July and 1.75% in October, according to a Bloomberg survey.