Irish inflation continued to top the euro-zone inflation league yesterday as overall figures subsided in May to the European Central Bank's (ECB's) self-imposed 2 per cent ceiling for the first time this year. Economists warned that the breakdown of the data painted a less benign picture for the EU as a whole.
According to EU statistics office Eurostat, consumer prices rose 0.1 per cent from the previous month, in line with economists' expectations.
The euro-zone annual inflation rate, which was last at 2 per cent in December 2001 and last below this level in May 2000, fell from 2.4 per cent in April.
However, Irish annual inflation at 5 per cent continued to buck the trend at two-and-half times the average, and well ahead of the next highest, Greece and the Netherlands on 3.8 per cent. Germany, the euro-zone's largest economy, reported the lowest inflation rate at 1 per cent.
Confirmation of the preliminary inflation rate estimate, released at the end of May, will offer some comfort to the ECB, which has often repeated that inflation will eventually move below 2 per cent.
But economists warned that a closer look at the breakdown of the report revealed worrying price trends.
Core prices, excluding energy, food, alcohol and tobacco costs, rose 0.3 per cent on a monthly basis, pushing the annual rate of increase of this measure of prices up to 2.6 percent from 2.4 percent in April.
"Core inflation is awful and the bond market is underestimating the possibility of a negative surprise from the ECB," said Mr Ken Watrett, chief euro-zone market economist at BNP Paribas in London.
IIB chief economist Mr Austin Hughes said the 2.6 per cent core rate suggested that stubbornly high inflation was becoming more of a problem in the euro zone.
Complicating matters even further, he said, was the evidence of a large and widening gap between low- and high-inflation countries, which would make it more difficult to find the right level of interest rates for the euro zone as a whole.
The drop in headline inflation, he added, largely reflected a flattering base effect as large increases in food and energy costs in May 2001 were not repeated last month.
He argued there was a reasonable possibility that the ECB could raise interest rates at its meeting on July 4th.
Meanwhile, underlying inflation in Britain has tumbled to its lowest since last November and the joint weakest since records began in 1975, dampening fears of an interest rate rise next month.
