The euro zone's annual rate of inflation hit a 2 year high in December, driven by fuel, food, alcohol and tobacco prices at a time when the ECB is dealing with a major sovreign debt crisis.
Consumer prices rose 0.6% from November, pushing the year-to-year rate up to 2.2% from 1.9% the previous month, the highest annual rate since October 2008 when it stood at 3.2%.
Consumer prices rose 0.6% from November, pushing the year-to-year rate up to 2.2% from 1.9% the previous month, the highest annual rate since October 2008 when it stood at 3.2%.
A surge in cost price inflation that is likely to be passed on to consumers, just as European governments are embarking on an austerity program limits the ECB's flexibility on the monetary front somewhat. But at the same time it should not be forgotten that price stability (i.e. low inflation) is the primary objective of the ECB, in contrast to the Fed that targets both price stability and unemployment.
Applying the brakes at a time when stimulation is most needed could bring Europe closer to the brink of stagflation. Considering the sovreign debt related uncertainty surrounding Portugal and especially Spain, the austerity measures and a whole lot of other problems, a rate hike might just prove too much to handle.
