January HICP flash: +2.4% y/y

MNI survey median: +2.4% y/y
MNI survey range: +2.2% to +2.5% y/y

Previous: Dec +2.2%, Nov +1.9%, Oct +1.9%, Sep +1.8%, Aug +1.6%
—

FRANKFURT (MNI) – Eurozone inflation accelerated further in January
to a 27-month high of 2.4%, Eurostat estimated on Monday.

Final figures along with a detailed breakdown will be made
available on February 28. National data out of Germany highlighted the
ongoing upward pressures from energy, which helped to push domestic
inflation to its highest level in over two years.

Recent developments in other commodities show that the rise in
inflation is more than just an energy story.

Late last week, sugar prices approached 30-year highs as the
European Commission considered boosting imports. News that developing
nations may look to hoard food to guard against future food price hikes
have led to soaring wheat and rice prices.

While underlying inflationary pressures still appear muted, as
evidenced by the monthly decline in M3 and the slowdown in annual money
supply growth in December, commodity prices are likely to add to upward
inflation pressures in the near term.

Other, albeit lesser, upside risks stem from the VAT increases in
various Eurozone states, along with wage negotiations currently
underway, most notably in Germany, which prompted European Central Bank
President Jean-Claude Trichet to warn against compensating imported
inflation with excessive pay increases: “Everybody knows we would not
let second-round effects materialize.”

Nevertheless, unless significant spillover from commodity prices is
seen leading to a rise in inflation expectations, an ECB rate hike is
unlikely in the near term. The relatively flat breakeven inflation curve
due to the sharp rise in the short end suggests that markets believe
that the rise in commodity prices will not endanger medium-term price
stability.

The January purchasing managers index (PMI) polls showed that
soaring commodity prices boosted input prices at their fastest pace
since August 2008. However, companies were able to pass on only part the
higher costs. “Price pressures have increased, especially in
manufacturing, although weak demand in the periphery is helping to keep
a lid on the pass-through of these costs to customers,” Markit Economist
chief economist Chris Williamson said.

The European Commission’s survey showed that selling price
expectations rose in all major sectors in January to their highest
levels in over two years.

While consumers polled in the Commission survey also revised up
their inflation outlook to the highest level since August 2008, it was
only slightly above the long-run average and well below levels seen when
inflation was at its peak two and a half years ago.

“We see evidence of short-term upward pressure on overall
inflation, stemming largely from global commodity prices,” Trichet said
earlier this month. “While this has not so far affected our assessment
that price developments will remain in line with price stability over
the policy-relevant horizon, very close monitoring of price developments
is warranted.”

“Inflation expectations over the medium to longer term continue to
be firmly anchored in line with the Governing Councils aim of keeping
inflation rates below, but close to, 2% over the medium term,” he added.

— Frankfurt bureau: +49 69 720 142; e-mail: frankfurt@marketnews.com —

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