Inflation fears—fueled by spiraling food, oil and raw material prices—are mounting around the globe, prompting the head of the European Central Bank to signal that it could raise interest rates in the future even though some countries have been weakened by the Continent's debt crisis.
In an interview with The Wall Street Journal ahead of this week's annual meeting of the World Economic Forum in Davos, Switzerland, Jean-Claude Trichet warned that inflation pressures in the euro zone must be watched closely, and urged central bankers everywhere to ensure that higher energy and food prices don't gain a foothold in the global economy.
Mr. Trichet's warning comes at a time when inflation concerns are mounting among investors around the world. Fast-growing emerging markets such as China and Brazil are seeing rising inflation at home, and their demand for globally traded commodities is pushing prices higher elsewhere.
While high unemployment and spare capacity are restraining underlying inflation pressures in the U.S. and elsewhere in the developed world, annual inflation in China is almost 5%—and a sizzling 9.8% economic growth rate in the fourth quarter triggered fears of more price pressures ahead. Inflation in Brazil is even higher.
With the global recovery still in its early stages, those moves could accelerate. Higher raw material prices, especially coal and iron ore, are pushing up steel prices across the globe. Steelmakers including AK Steel and Nucor in the U.S., and China's Baosteel and South Korea's Posco—the world's second and third largest—have been steadily increasing prices in recent weeks. The world average carbon-steel price is forecast to exceed $1,000 per metric ton by the second half of 2011, up from an average $733 last year, according to U.K.-based consultancy MEPS.
"All central banks, in periods like this where you have inflationary threats that are coming from commodities, have to…be very careful that there are no second-round effects" on domestic prices, said Mr. Trichet in his office overlooking Frankfurt's financial district.
Global inflation isn't just coming from volatile commodities that track the ups and downs of the world economy. Fast-growing emerging nations are taking increasingly aggressive actions to beat back rising food prices as they grow more worried about threats to stability.
Mr. Trichet's remarks come as the ECB must balance a widening debt crisis in Southern Europe and Ireland with a robust recovery in its largest member, Germany, and rising inflation throughout the euro bloc.
Last month, inflation unexpectedly jumped to 2.2% in the euro zone from 1.9%, the first time in more than two years it has exceeded the ECB's target of just below 2%. Some economists say it will rise above 2.5% in the next two months.
In Greece, Ireland and other countries on the euro zone's periphery, austerity drives are pushing up unemployment and bringing additional pain to economies already struggling with the effects of burst credit bubbles. Many economists worry that higher interest rates would do further damage in such countries, where the interest burdens on high private-sector debts are closely linked to the ECB's policy rates. Mr. Trichet rejected calls to take special heed of stragglers on the euro zone's fringe.
"All countries in the euro area have an immense stake in the solid anchoring of inflation expectations," he said.
Mr. Trichet first ratcheted up his anti-inflation rhetoric at his monthly news conference earlier in January, spurring many economists to move forward their forecasts for rate increases.
In the interview, he dismissed some economists' argument that the ECB should hold off on raising rates because euro-zone "core" inflation, which excludes food and energy prices, was still weak at 1.1% in December.
"In the U.S., the Fed considers that core inflation is a good predictor for future headline inflation," he said. But in the euro zone, "core inflation is not necessarily a good predictor."
That implies the ECB could raise rates this year if it senses that companies and workers expect headline inflation to stay above 2% for some time—even if the main source of inflation is world commodity markets. Read more. (Subscription required.)
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