Oil Price Fuels Rise in Inflation Across Europe

The surge in oil prices yesterday pushed inflation in the 25 European Union nations to 2.2 per cent for August, and prompted an admission from the European Commission that growth forecasts for this year will be downgraded.

At about $65 a barrel, the cost of oil helped drive up EU inflation from 2.1 per cent in July, though the figure for the 12- nation eurozone was stable at 2.2 per cent.

The EU’s statistical unit, Eurostat, identified significant rises in the cost of heating oil and fuels for transport. Package holidays rose in price as airlines applied fuel surcharges to cover the increased cost of aviation fuel.

The European monetary affairs commissioner, Joaquin Almunia, conceded that growth projections will have to be revised downwards. ‘There was a downward risk presented by the evolution of oil prices and this risk has materialised in the last month,’ he said.

‘When we publish our next forecast in November, we will report a growth rate below the 1.6 percent target for the eurozone but also a positive impact and good evolution for 2006.’

But Mr Almunia added that he is ‘optimistic about growth in the third and fourth quarters’ and said the Commission will have ‘a good forecast for 2006′.

‘One of the reasons oil prices are high is that demand is high. This demand will be positive for growth,’ he said.

Analysts too believe the export-led recovery of the European economy has proved resilient despite the surge in oil prices. That is mainly because the euro’s 10 per cent drop against the dollar this year is helping to make European products easier to sell abroad.

Thomas Mayer, the chief European economist at Deutsche Bank, said: ‘The lesson we have learned over the past 12 to 24 months is that the oil price has become less relevant than it once was. The world economy is holding up relatively well.’

Deutsche predicts eurozone growth of 1.4 per cent this year and 1.8 per cent in 2006, with inflation hovering at the 2 per cent level for both years. It also believes that, despite the negative effect on growth, the European Central Bank will, in the first quarter of next year, raise rates for the first time since June 2003, despite the negative impact of the oil price rise on growth.