Why This Morning's Surprising Eurozone Inflation Number Could Make The PIIGS Squeal


Photo: Alan Levine via Flickr

The European Central Bank is about to be faced with a decision it only knows one way of answering.Today, data from Eurostat showed that inflation has accelerated in the eurozone by 2.2% year-over-year in December. This is the fastest rate of inflation growth in the entire history of the eurozone (since 1999), and above the ECB’s rate target of 2%.

In the U.S., this wouldn’t matter. The Fed has a dual mandate, with both a need to focus on unemployment and inflation. So even if the U.S. were to have higher than expected inflation, they Fed could still keep money loose.

But the ECB has only one goal: price stability. And right now, it is not achieving that goal.

So if the ECB sticks to its mandated goals, it should either pare back the liquidity programs it has initiated in support of eurozone banks or raise rates.

It isn’t likely to do so just yet, and maybe not until Q4 2011 (according to a Reuters survey), but overtime the pressure will continue to grow, especially if inflation continues to run high.

That’s bad news for PIIGS countries just starting to show signs of a rebounding. In places like Spain and Ireland, unemployment remains very high. But that’s not the ECB’s problem.

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