Europe Inflation Accelerates to 3.5%, Sentiment Drops

By Fergal O’Brien

(Bloomberg) European inflation accelerated to the fastest pace in almost 16 years, making it harder for the European Central Bank to cut interest rates as a global credit squeeze saps confidence among executives and consumers.

Consumer-price inflation in the euro area accelerated to 3.5 percent this month, the highest rate since June 1992, the European Union’s statistics office in Luxembourg said today. The euro rose after the publication of the figure, which was higher than economists had forecast. A separate report showed consumer and business confidence declined in March.

And that’s with a strong euro keeping import prices lower than otherwise.

“This will surely dash any residual hopes of a near-term rate cut,” said Dario Perkins, an economist at ABN Amro in London. “With inflation this high, it would take a major deterioration in the real economy to prompt the ECB to lower interest rates this year.”

Yes.

March inflation was faster than the 3.3 percent median forecast of 36 economists in a Bloomberg News survey and the acceleration pushed the rate further above the ECB’s 2 percent ceiling, a target it hasn’t achieved in the last eight years.

The euro rose as high as $1.5834 after the inflation report and was up 0.1 percent to $1.5807 as of 12:15 p.m. in London.

High inflation = Strong currency???

That’s the current paradigm as markets trade as if interest rates are more important for currency pricing rather than purchasing power parity.

Still, there are signs the euro-area economy is so far weathering the U.S.-led slowdown. German and French business confidence climbed in March and unemployment in the euro region was a record low 7.1 percent in January.

Low unemployment scares the ECB a lot.