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Inflation stirs in Europe and provokes 'raise rates' demands

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  • Inflation stirs in Europe and provokes 'raise rates' demands

    Inflation stirs in Europe and provokes 'raise rates' demands

    A property boom and surging energy costs have led to the first clear signs of inflation across the eurozone, prompting calls for tougher action from the European Central Bank.

    The ECB said yesterday that household loans in August rose 10.7pc across the 12-nation bloc compared with a year earlier, led by double-digit house price rises in Spain and France.

    Inflation is at last beginning to stir in Germany after years of slumber, jumping from 1.9pc in July to 2.7pc in August - well above the consensus forecast.

    Analysts expect eurozone inflation to reach 2.6pc to 2.8pc when the European Commission's data is released on Friday.

    Joachim Fels, an economist at Morgan Stanley, said Europe was now facing a full-fledged 1970s-style "stagflationary shock".

    He said: "This monetary growth is becoming inflationary. Consumer surveys show that it's gradually feeding through into expectations."

    The markets have begun to price higher inflation into eurozone bonds. Interest rates on French and Italian index-linked bonds have risen roughly 0.25pc since early August, while Germany's benchmark 10-year "bunds" have jumped 0.15pc in a matter of days.

    The ECB said M3 "broad" money rose 8.1p in August year-on-year, up from 7.9pc a month earlier.

    The indicator, which includes bank deposits, is watched closely by Frankfurt's hawks for clues about future inflation.

    The money supply has been on an accelerating trajectory for several months and is now far above the ECB's 4.5pc target.

    Mr Fels called for a rise in interest rates from the current level of 2pc before inflation becomes embedded in the system, though many analysts are sticking to their line that the energy spike is a one-off effect.

    "Prices are not going to continue going up at this pace," said Stefan Bielmeier, Deutsche Bank's chief economist in Frankfurt, adding that tobacco taxes and a surge in clothes and shoes had also distorted the September data.

    Eurozone inflation now appears to be tracking price pressures in America, albeit with a time-lag. US inflation was 3.6pc in August, but running at a 5pc clip for the past six months alone.

    Europe was shielded for a while by the high euro from the inflationary effect of high oil prices, but the currency has slid roughly 10pc against the US dollar since the Dutch and French voters caused mayhem in the early summer by voting against the European constitution.

    News source:
    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx