European Inflation Rises To 4%, As Energy Costs Soar

Source: Daily FX

European consume prices rose to 4.0% from 3.7% the month prior on an annualized basis, which is the highest in more than 16 years. The record setting pace of oil has fed rising gasoline and heating costs. The ECB and economist had expected prices to reach these levels, which was the cause for the central bank to raise its benchmark interest rate to a seven year high of 4.25%. The regions largest economy Germany saw pries rise 3.4%, which has led to investor confidence falling to a record low in July. The European economy is beginning to whither in the face of the headwinds from the U.S. credit crisis and a global slowdown, which has increased fears that the central bankʼs raising of credit costs will push the economy towards a recession. Therefore, expectations are that the recent rate hike was a single event and that rates will remain on hold the remainder of the year. If growth continues to weaken and inflation pressures begin to ease the next move for the ECB may be to lower rates, despite their price stability mandate.