BRUSSELS - The recent surge in oil prices to record highs could cut short a decline in eurozone inflation and encourage the European Central Bank to raise interest rates, economists said on Thursday.Earlier the European UnionÂ’s Eurostat data agency reported that inflation in the 12 countries sharing the euro eased in March to 2.2 per cent from 2.3 per cent in February, confirming a previous estimate. That brought inflation closer to the European Central BankÂ’s preferred rate of less than but close to two per cent.
However, as oil prices reached new peaks on Thursday above 74.0 dollars in London and 72.0 dollars in New York, economists said that the downward trend in headline inflation towards the ECB’s target would be temporarily reversed. “Over the next few months, there may be a risk that the slowdown in the headline rate is held back from hitting 2.0 percent by the impact of the latest oil spike, but the underlying trend is definitely towards lower inflation in the coming months,” said Bear Stearns economist David Brown.
Even though underlying inflation remained tame, economist Howard Archer with consultancy Global Insight said that upward march in oil prices would put pressure on the ECB to raise interest rates in order to keep inflation in check. “The central bank remains concerned about the risks to medium-term price stability from persistently high energy prices,” he said.
“With oil prices currently hitting new record highs and a number of other commodity prices at elevated levels, this concern is likely to be reinforced,” he added
ECB chief economist Otmar Issing indicated that the Frankfurt-based central bank might have to revise its inflation forecasts upwards following the latest surge in oil prices. In March ECB staff forecast that eurozone inflation would average 2.2 percent this and next year.