Inflation in the dozen euro nations accelerated to the highest in more than two years in May amid record energy costs, adding another deterrent to consumer spending and increasing the risk that growth may slow this quarter. Consumer prices rose 2.5 percent from a year ago, the fastest pace since March 2002, after increasing 2 percent in April, the European Union's statistics office said. Economists in a Bloomberg News survey forecast a rate of 2.3 percent. Business and consumer confidence fell, surveys by the European Commission showed.
Higher gasoline prices are leaving European consumers already concerned about rising unemployment and pension costs with less money to spend on other goods and services. In contrast to the U.S. and Japan, where household demand is helping to boost economic growth, European consumers are ``very hesitant,'' European Central Bank Chief Economist Otmar Issing said yesterday. ``There is some concern about the euro area economy,'' said James Knightley, an economist at ING Bank NV in London. ``The pace of growth is not going to be as high as people had been expecting a few months ago. It doesn't really alter the outlook of steady rates from the ECB for a long time to come.'' The ECB, which aims to keep inflation close to and below 2 percent, hasn't touched borrowing costs since June, when it cut its benchmark rate to 2 percent, the lowest in any euro-region country for six decades. Officials meet next week to set rates.
Euro Drops
The euro fell against the dollar after the inflation report. The currency was down 0.1 percent at $1.2246 at 1:32 p.m. in Brussels, erasing an earlier gain of as much as 0.3 percent. The euro's 4.6 percent decline from a Feb. 18 record has exacerbated the gain in oil costs, which are priced in dollars. European stocks also fell on concern about the effect of accelerating inflation on the economy. The Dow Jones Stoxx 50 Index dropped 0.5 percent to 2674.28 points at 1:32 p.m., erasing an earlier increase of 0.5 percent. Oil prices have surged more than 20 percent this year, driving up inflation across the region. The inflation rate in Germany rose to the highest in more than two years in May, the government said Tuesday. Spain's inflation rate rose to a 14-month high of 3.4 percent, the country's statistics office said today. Accelerating inflation may also be weighing on sentiment among companies and households. Business confidence fell to minus 5 from minus 4 as production expectations and order books fell, a commission survey of 25,000 companies showed. An index based on the same number of households showed consumer confidence slid to minus 16 from minus 14 on concern about employment and growth.
Consumer Concern
Consumer expectations for price trends over the next 12 months rose to 10 from 3, the survey showed, the highest level of concern about future inflation in the past year. Consumers plan to save more over the next 12 months, and are making less major purchases at present, the commission said. In the U.S., the world's biggest economy, consumer spending may have had the smallest gain in six months in April as higher energy prices left shoppers with less money to spend on other goods and services, a Bloomberg survey of economists showed before a report at 8:30 a.m. in Washington today. The U.S. inflation rate rose to 2.3 percent in April from 1.7 percent in March. The euro region's economy expanded at the slowest pace in a decade in 2003 and is still trailing growth in the U.S. and Asia. The economy grew 0.6 percent. While that was the fastest in three years, it compares with comparable rates of 1.1 percent in the U.S. and 1.4 percent in Japan.
Commission Forecast
Oil prices are 26 percent higher than the $31.10 a barrel assumed by the commission in its economic forecasts. The commission, the executive arm of the European Union, predicts economic growth of 1.7 percent this year. The ECB said this month it expects inflation to exceed its ceiling ``over the short term.'' ECB council members Klaus Liebscher and Jaime Caruana agreed yesterday it is too early to say whether rising oil prices will make the ECB revise its growth and inflation forecasts. Oil prices reached record of $41.72 a barrel on the New York Mercantile Exchange Monday. Deutsche Lufthansa AG, Europe's third- biggest airline, said this week it's raising the oil surcharge at its cargo unit by 25 percent starting June 7 to offset ``the continued rise in the cost of crude oil and crude-oil products on the world market.'' High energy prices may highlight splits on the ECB's 18- member governing council between those led by Issing who focus their analysis on inflation risks, and others alert to the dangers to the economy, according to economists including Dominique Barbet of BNP Paribas SA in Paris.
`Divergent Opinions'
``We will continue to see divergent opinions between those which have a monetarist approach, who will want a strict approach to inflation, and others who see that rising petrol prices have a temporary effect on inflation and the more durable effect is on purchasing power,'' Barbet said. Accelerating inflation and expectations that the U.S. Federal Reserve will raise interest rates next month have wiped out talk of an ECB rate cut, future trading shows. The yield on the three- month interest-rate futures contract for September rose two basis points to 2.18 percent today, up from 1.85 percent March 26. That compares with a three-month money market rate of 2.09 percent.
``The ECB should lower rates,'' said Emmanuel Ferry, an economist at Paris brokerage Exane BNP Paribas. ``To focus on inflation in the short term would be an error of monetary policy. A good analysis would look at the risk to growth.'' Liebscher, governor of Austria's central bank, said ``one mustn't underestimate the development'' of oil prices, saying: ``It's possible that we have a scenario of very, very high oil prices in the longer term which can have an impact on inflation and growth.'' Nout Wellink, who represents the Dutch central bank, said the surge in oil prices is having a limited effect on the world economy because demand and real prices aren't at highs reached during periods such as the 1973 oil crisis. ///www.bloomberg.com