Page last updated at 11:58 GMT, Monday, 16 June 2008 12:58 UK

Eurozone inflation at record 3.7%

lorry protest
Lorries drive to London to protest fuel price increases

Inflation in the eurozone has a climbed to a record level amid higher food and fuel costs, official figures show.

The annual rate of inflation in the 15 state zone hit 3.7% in May, according to the Eurostat statistical office.

The figure is the highest since 1996, when Eurostat started using the current methodology for calculating inflation.

There are concerns that price growth will keep accelerating, and the European Central Bank warned it will raise interest rates to slow inflation.

The rate of inflation was up from 3.3% in April, and compares with a 1.9% figure in May 2007.

Eurostat said that the main driver of inflation last month was an increase in food prices, which were up 6.4%, and transport costs, which were 5.9% higher.

Monday's figures are for the 15 nations that use the euro.

Across the European Union as a whole, the rate of inflation climbed to 3.9% in May.

Global problem

Central banks around the world have been struggling to keep inflation under control as food and oil prices rise.

This has led to growing pressure to increase interest rates to counteract the rise of inflation.

Earlier this month the ECB decided to hold interest rates for the Euro bloc at 4%, but ECB President Jean-Claude Trichet hinted an increase in interest rates was "possible" at its next meeting.

"We considered - it is not excluded - that after having carefully examined the situation, we could decide to move our rates [by] a small amount in our next meeting in order to secure the solid anchoring of inflation expectations", said Mr Trichet at the time.

But despite the high inflation in the eurozone, the ECB has been reluctant to increase rates - which have been steady since July 2007 - as there are growing signs that the bloc's economy is weakening.

In May the NTC Research Institute's purchasing managers' index slumped to its lowest level since July 2003, and official EU data showed that retail sales fell in April.

Howard Archer, economist at Global Insight, said: "The May eurozone consumer price data are likely to seal an interest rate hike from 4% to 4.25% at the ECB's 3 July meeting."

Meanwhile, the US Federal Reserve has effected a series of aggressive interest rate cuts - from 5.25% to 2% since last September.

However with US inflation rising the next move in rates may be upwards.

The Bank of England has also trimmed UK rates, which are now at 5%.

The combination of ECB holding rates steady and UK and US central banks cutting rates has sent the euro to record highs against the dollar and sterling since the beginning of the year.

This has made eurozone exports more expensive and sparked criticism from some leading exporters, such as plane maker Airbus.

Some analysts have predicted rates will come down in order to boost the eurozone economy.




SEE ALSO
Spanish hauliers on fuel strike
09 Jun 08 |  Europe
French and Italian output shocks
10 Jun 08 |  Business
Euro inflation is 'uncomfortable'
02 Jun 08 |  Business
Trichet hints at future rate hike
05 Jun 08 |  Business

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