Eurozone inflation spikes up to 27-month high

[January 31, 2011]  LONDON (AP) -- Consumer price increases in the 17 countries that use the euro have accelerated further above the European Central Bank's target, just days ahead of its monthly policy meeting, official figures showed Monday.

Eurostat, the EU's statistics office, said that consumer prices were 2.4 percent higher in January than the year before -- a 27-month high. January's increase was up from December's 2.2 percent gain and ahead of expectations for a 2.3 percent rate.

No further details were provided but higher energy and commodity costs are expected to have been behind the rise. A more detailed picture of inflation during the month will be published later in February.

The increase is likely to stoke jitters at the European Central Bank, which is tasked to keep inflation "close to, but below 2 percent."

After the last meeting in January, the ECB's president Jean-Claude Trichet warned that short-term upside risks to inflation had increased, mainly owing to energy prices. Trichet's comment that the inflation numbers merited "very close monitoring" was interpreted in the markets as a warning that interest rates could eventually be lifted earlier than expected.

Though Trichet is expected to sound a hawkish tone on inflation following Thursday's meeting, a rise in the main interest rate this week from the current record low of 1 percent is considered extremely unlikely, partly because there are few signs yet that price rises are lifting wage demands given a eurozone unemployment rate around 10 percent.

"As the temporary boost from higher food and energy prices begins to reverse, we expect the headline rate of inflation to fall back to well below the ECB's 2 percent ceiling," said Ben May, European economist at Capital Economics.

In addition, rate-setters remain concerned about the impact on growth levels this year from the austerity programs being pursued by a number of countries within the eurozone. Higher interest rates would be the last thing countries like Greece, Ireland, Portugal and Spain will want to contend with as they cut spending and raise taxes in an effort to get a handle on their public finances.

[Associated Press; By PAN PYLAS]

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