Wednesday, December 19, 2007

Trichet warns again about inflation

The following story begs the obvious question: if the ECB is worried about inflation then why doesn't it do its job and hike rates?

Dec. 19 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said his economy faced a ``more protracted'' period of elevated inflation than previously expected, signaling he's not planning to cut interest rates to ease a credit squeeze.

``The risks to price stability over the medium term are clearly on the upside,'' Trichet told the European Parliament's economic and monetary affairs committee in Brussels today. ``The ECB's Governing Council stands ready to counter upside risks to price stability.''

European inflation accelerated to 3.1 percent last month, the fastest pace since May 2001 as food prices soared. The risk that inflation will remain above its target of just below 2 percent is preventing the ECB from following counterparts in the U.S., U.K. and Canada in reducing borrowing costs.

A surge in prices for food and oil have created a ``strong upward'' effect on inflation, which would build if wages and other costs rise to compensate, Trichet said. He repeated that the bank expects consumer prices to increase about 2.5 percent next year after 2.1 percent in 2007.