EU officials sounded the alarm on Friday as high oil prices sent eurozone inflation soaring. The annual inflation rate leapt to 2.5 percent in October from 2.1 percent in September, rising further away than economists had expected from the European Central Bank's goal of keeping it close to but below 2 percent.
Policymakers were quick to express concern at the latest reading, which matched two-year peaks set in May and followed a strong rally in oil prices.
"I think the impact of the rise in the oil price is reflected in the advance indicator published today. We hope it doesn't worsen," European Monetary Affairs Commissioner Joaquin Almunia said in Madrid.
The ECB, which sets interest rates for the dozen countries that share the euro, has already flagged the risk that increases in oil prices, which have set record highs, will fan inflation and leave households with less money to spend on other things.
Howard Archer of Global Insight said the spike higher in inflation would not go down well at the ECB, which holds a policy meeting next week.
"Even so, we believe that the ECB should hold fire on interest rates well into 2005, given the significant pressures facing eurozone recovery including record high oil prices, the renewed appreciation of the euro, slowing global growth and the persistent weakness of domestic demand," he said.
European Trade Commissioner Pascal Lamy voiced concern about the impact that higher oil price could have on growth.
"It has an impact on inflation in the (European) Union and therefore it has put a brake on growth, there's no doubt about that," he said.
Still, there were some crumbs of comfort.
Almunia and Lamy both pointed out that the strength of the euro, which has hit eight-month highs against the dollar, had blunted the impact of the increases in the price of oil, which is quoted in US currency terms.
"If we had the exchange rate of three or four years ago then the impact in inflation in terms of the European Union would have been much greater," said Lamy.
The European Commission has already signalled the risks posed by higher oil prices. Earlier this week it cut its eurozone growth forecast for 2005 and predicted inflation in the bloc would turn out to be higher than it previously expected. Nevertheless, Brussels' official forecasts, published on Tuesday, show it expects eurozone inflation to subside and average just below 2 percent next year.
Almunia hammered that message home again on Friday.
"We are confident that if there are no so-called second round effects, this rise in prices will not consolidate and the inflation rates for the eurozone and the whole European Union will fall back below 2 percent," he said.
Policymakers looking for good news can also turn to October eurozone economic sentiment data which was released separately on Friday and showed morale was holding up well.
A more optimistic mood in industry, retail trade and construction more than offset a setback in consumer confidence and caused an unexpected rise in the overall index.
Economic sentiment climbed to 101.3, above economists' expectations of a 100.50 reading, as industry sentiment rose to minus 2 from minus three in September and morale in retail trade improved to minus 6 from minus 9.
Consumer sentiment fell back to minus 14, erasing the gain seen in September when it had risen to minus 13.
Exporters could start feeling the pinch of the stronger euro, which will erode the international competitiveness of their goods and erode the value of foreign currency earnings.
However, the latest surge in the euro may have come too late to affect the sentiment survey as data on which it is based is typically collected in the first two weeks of each month.
The single currency earlier this month broke out of ranges that had prevailed for eight months and has since gone on to scale peaks that were within a cent of its record highs against the dollar.
Against this backdrop, analysts warned that sentiment may crumble in the coming months.
"The survey suggests October has seen some improvement in real activity in Euroland. The question is, will it last? We think that persistently high oil prices and tighter monetary conditions will dampen growth in the next few months," said economists at Goldman Sachs.
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