Friday, February 01, 2008

Record Eurozone Inflation

Source: Eurozone inflation soars to 14-year high
The current Eurozone inflation rate of 3.2% represents a 14-year high, providing a strong case for the decision of the European Central Bank to not cut interest rates, despite the region’s slowing growth rate. Unlike the US Federal Reserve, who recently made sharp interest rate cuts in an attempt to bolster a slowed economy, the ECB is not expected to budge from its 4% interest rate.
The rise in inflation is attributed to a “hump” in inflation resulting from higher fuel and food prices, which are creating a longer lasting effect on the economy than anticipated. January’s rate is the highest since the ECB took control of the monetary policy in the eurozone in 1999. It is also significantly above the ‘target rate’ of 2%. This is further complicated by the fact that growth in the eurozone is typically less volatile than growth in the U.S. and recent trends suggest that the region has a significant chance of falling into a recession in the next two years.
Although the slowdown in growth is noticeable, both the housing and industrial markets seem to be faring better than most. The service sector and consumer markets are experiencing the sharpest falls in confidence, with German retail sales showing last Thursday that spending in Europe’s largest economy fell by 2.2% last year. However, Germany also reported a sharp drop in seasonally adjusted unemployment—the 89,000 drop represents the lowest unemployment figure in 15 years. However, Eurostat, the European Union’s statistical unit, warned that this ‘flash’ was “more uncertain than usual” because of statistical changes in Germany.

Questions for Discussion
Is the ECB’s consistent refusal to lower the interest rate good policy?
How ‘real’ is the threat of a recession and what effects is a recession in this region likely to affect the global economy?

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