‘Fragile’ Eurozone hammered by inflation

Inflation in the Eurozone soared to record levels in January…

The inflation rate hit 3.2%, and consumer prices are now growing at their quickest rate in the 15-nations eurozone since records began in 1997. The rate is much higher than the European Central Bank’s target of 2%. The ECB faces the tough challenge of controlling inflation, which can be done by raising interest rates, at a time when the economy is slowing.

The inflation numbers come as confidence in the euro bloc’s economy among businesses and consumers slumps to a two-year low. A European Commission index of sentiment fell to 101.7 this month, the lowest since January 2006.

Fragile position

There are increasing signs of a slowdown in the region amid fears that financial market turmoil – and a possible recession in the US – could further destabilise the engines of growth in the bloc, such as Germany.  But some analysts predicted that slowing job growth would dampen the risk of inflation from spiralling further, and allow the ECB to lower interest rates from their current level of 4%.

“We believe that eurozone growth will slow markedly over the coming months,” said Howard Archer, an economist at Global Insight.  This will dilute underlying inflationary pressures and eventually compel the ECB to cut interest rates rather than raise them.”