Persistent inflation affecting US poses real risk to Europe, warns…

BLOOMBERG – Rising inflation in the euro zone, increasingly relative to inflation in the United States, is raising fears that the European Central Bank (ECB) could face obstacles like the Federal Reserve in cutting interest rates.

Although there are clear differences Drivers Rising prices, a point highlighted by ECB leaders, have some economists seeing important parallels and cautioning against underestimating the risk of continued pressures.

read more: Inflation in US could take 3 years to fall to 2%, Cleveland Fed model suggests

The cut (6) widely signaled for this Thursday’s meeting is taken for granted, but there are fears that continued inflation in the US will dampen subsequent rapid moves.

After defying inflation expectations in recent months, the central bank has already had to reconsider monetary easing, although the market believes there will be a cut this year.

“The US’s problems with persistent inflation may still spill over into Europe,” said Carsten Bresky, global head of macro research at ING. “The ECB would do well to be careful not to categorically rule out the risk of an inflationary rebound like the one seen in the US.”

May’s inflation data for the 20 euro zone countries is the latest warning sign for the ECB, with the annual rate accelerating to 2.6%. More worrisome is the rise in service prices and the unexpected strengthening of fundamental pressures.

Andrzej Szczepaniak, an economist at Nomura, cited a stronger-than-expected expansion in GDP and the prospect of a consumer-led recovery. Stronger demand allows companies to pass on higher costs to consumers.

Constantin Weed, a manager at Pimco, describes inflation as “highly correlated” globally. “So if America faces a big problem, at least the eurozone won’t have a small one.”

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