Interest rates will almost certainly rise in September following larger-than-expected increases in French and German inflation.
The acceleration of German and French consumer prices in June has raised concerns that the inflation rate in the 11 countries sharing the euro will breach the European Central Bank's 2 per cent ceiling for the region.
Germany and France, which account for more than half the euro zone's economy, had held back inflation in the region earlier this year. Signs that companies are starting to pass on higher costs for oil and other raw materials to consumers makes it more likely the ECB will raise interest rates further, analysts said.
"Euro zone inflation will average 2.2 per cent in June, well above the European Central Bank's upper limit," said Mr Emmanuel Ferry, an economist at Paris brokerage Exane.
According to Mr Pat O'Sullivan, the European Central Bank will respond with another rate rise in September.
Prices in Germany rose 0.7 per cent in June, the largest gain since records began in 1997. Over 12 months, prices rose 2 per cent. In France, prices rose 0.3 per cent in June and 1.9 per cent in the year, the largest increase since July 1996.
Mr O'Sullivan added that a half percentage point rise in interest rates is possible. However, the ECB is unlikely to push rates above 4.75 per cent or 5 per cent.
"Growth is not accelerating across the euro zone but is stable at 3 per cent and is very reliant on exports and consumer demand is still not as strong as external demand so the ECB will not want to risk pushing rates too high," he added.
He also noted that higher oil prices are still having a significant impact on inflation figures across the euro zone. Average euro zone inflation was 1.9 per cent in May, just below the ECB's ceiling. Inflation in eight States, however, was already above the 2 per cent level. Ireland's inflation rate was 5.1 per cent in May, while Spain's was 3.2 per cent. Both are likely to have accelerated in June.
According to Mr O'Sullivan, Irish inflation is likely to have reached at least 5.5 per cent when it is announced next Tuesday. And it will accelerate further towards 6 per cent over the coming months.
