EU says euro economy inflation to surge this year

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EU's top economy official Joaquin Almunia. Photo: EFE

The European Union said Monday that euro economy inflation would surge more than expected this year as growth slows down from a recent boom.

But it insisted that Europe was resilient and so far saw “no firm signs of a credit squeeze” and was far from recession, even though it said global trade is slowing markedly and the United States is on the brink of a major recession that would hurt major exporters.

Higher energy and food prices would push inflation in the euro economy to an average 3.2 percent this year from 2.1 percent last year, it said, far above the European Central Bank's recommended guideline of just under 2 percent.

The EU also cut its Monday growth forecast for the 15-nation currency zone to 1.7 percent this year, from an earlier forecast of 1.8 percent and well below growth of 2.6 percent last year, saying the current outlook was "unusually uncertain."

Inflation is one of Europe's biggest worries as oil prices race to new highs and food prices soar on higher world demand, adding pressure on the ECB to steer clear of rate cuts even though those could boost a slowing economy.

The EU's top economy official, Joaquin Almunia, said it was crucial to avoid anything, such as large wage hikes, that would start an inflation spiral that would hurt people on low incomes.

Recent record highs for food, oil and metal prices risk worsening “temporarily dire” inflation as they push up production costs for other goods, an EU report warned. It said part of these huge price hikes were caused by a weaker U.S. dollar and financial turmoil that saw investors put their money into commodities such as oil, which has shot up in price.

The weaker dollar will likely hit European exporters harder in the future, the EU said, steering away from an earlier line that Europe has not seen any ill-effects of a strong euro.

“The negative impact on euro-area exports is likely to be larger in the future than it has been in the recent past, due to the usual lags in the reaction of trade to exchange rate developments and cooling global growth,” it said.

Lower growth will see France increase its yearly budget deficit, the difference between government revenues and outcome each year, to the EU ceiling of 3 percent next year, risking a joint euro nation effort to eliminate all budget deficits by 2010 to keep the currency stable.