More evidence today of how the Central Bankers and their economic advisers are doing their best to sound the inflation alarm. This time it is ECB Chief Economist Otmar Issing:
European Central Bank Chief Economist Otmar Issing said a surge in oil prices may lead to higher-than- expected inflation in 2006, as the bank edges closer to raising interest rates for the first time in five years.
“Rising oil prices are not only affecting current inflation rates but they’re also overshadowing next year,” Issing said in an interview on Oct. 14 at a banking event in Frankfurt. “It can’t be ruled out that risks for price developments will deteriorate that much over the medium term that we might have to expect the annual inflation rate to slightly exceed 2 percent.”
The comments were the second in three days suggesting the bank may raise its inflation estimate of 1.9 percent for 2006. The bank projects the level this year at about 2.2 percent. ECB President Jean-Claude Trichet said at a briefing after the annual meeting of the Group of 20 industrial and developing near Beijing yesterday that he can’t exclude inflation being “over and above” the bank’s 2 percent ceiling.
My view: this very much depends on the evolution of oil prices. There is little evidence of any strong impact on ‘core prices’ at this point, there is plenty of evidence of growth weakness. There is thus little justification from a purely eurozone perspective for any short term increase in interest rates, and certainly no justification whatsoever in the case of Germany.