Euro zone inflation surged back to a historic peak of 3.6 per cent in May, data showed today, dampening the case for interest rate cut by the European Central Bank this year despite a slowing economy.
Price growth in the 15 countries using the euro speeded up slightly more than expected from April's 3.3 per cent year-on-year rate, the European Union statistics office said, even further from the ECB's target of just below 2 per cent.
Analysts polled by Reuters had expected inflation to be 3.5 per cent, a touch lower than March's 3.6 per cent, a figure boosted by soaring prices of energy and food.
"The ECB will keep the rate on hold well into next year, but they will harden their language at their June meeting, pointing to record inflation as one of the reasons to do so," said Holger Schmieding, co-head of Europe Economics at Bank of America.
Eurostat's flash estimate contained no monthly data or details, but separate country data already showed inflation surging in Germany, the euro zone's biggest economy, to 3 per cent from 2.4 per cent.
Belgium reported yesterday its annual inflation hit a 23-year high of 5.21 per cent in May, after 4.15 per cent in April. Spanish inflation rose to 4.7 per cent, the highest in records dating back to 1997, from 4.2 per cent.
Separately, Eurostat said the euro zone's unemployment rate remained stable in April at 7.1 per cent, despite an expected economic slowdown in the second quarter of 2008.
Analysts said the data worsened the ECB's dilemma on what to do with interest rates - cut them to bolster growth or raise them to keep inflation in check.
So, the bank will probably keep them on hold this year at the current level of 4 per cent, they said.
The economists expected the ECB to be hawkish verbally on inflation, but follow closely data that suggest a euro zone slowdown in the wake of a credit crunch caused by the US subprime mortgage crisis.
"It is looking ever more likely that the ECB will not trim interest rates until 2009 as it will want to see extended, clear evidence that weaker growth is diluting underlying inflation pressures," said Howerd Archer, chief UK and European economist at Global Insight.
Data today showed German retail sales unexpectedly fell for a second successive month in April, sending the euro down against the dollar and fuelling concerns about the country's outlook.