Inflation is likely to remain high for some considerable time, economists have warned, as the euro and oil prices continued yesterday on widely divergent paths.
The euro fell to another record low against both the dollar and the yen while oil prices hit their highest prices since the Gulf War. It closed yesterday at 0.8757 cents against the dollar, in European trading hours. It subsequently fell below 87 cents, before recovering slightly.
Mr Austin Hughes, chief economist at Irish Intercontinental Bank, warned that inflation is now likely to rise to 7 per cent and could remain at around this mark into next year if oil remains at its current price and the euro does not recover.
"The news is going to get worse before it gets any better," he warned.
The only bit of good news for the euro were reports that the Reserve Bank of Australia intervened in favour of that currency, a move which could support some hope that the European Central Bank may consider doing the same for the euro.
But the factors spelling bad news for the euro continue to emerge. Political concerns were renewed after the intervention of the German chancellor, Mr Gerhard Schroeder, who welcomed the weak euro as good news for the domestic economy. "The current euro-dollar rate is more of a reason to be happy than concerned," he said.
And once again US productivity numbers came in higher than expected, with now all but a very few doubters converted to the idea of a new economy operating in the US. The evidence is, of course, much less persuasive in the EU, persuading many investors to hold dollars rather than euros.
The productivity of US workers rose in the second quarter at a faster pace than previously thought and labour costs fell, a government report showed yesterday. Oil prices are also weighing on the euro. Of course, higher oil prices are also negative for the US, the world's largest producer but the markets have decided they are worse for Europe. This is partly because the weak currency makes dollar denominated oil even more expensive, but also because they believe the ECB is more likely to raise rates to combat rising inflation than the Fed which generally takes a more relaxed attitude.
In European trade, the euro fell to $0.8757, the lowest since its debut in January 1999, from $0.8876 cents on Tuesday. Traders said these all time lows are acting like a "magnet" and that market psychology is very negative.
At the same time, crude oil rose for a fourth day and reached a 10-year high on traders' expectations that any production increase agreed to by OPEC this weekend will not be enough to reduce prices or relieve declining inventories.
Crown Prince Abdullah of Saudi Arabia said on Tuesday night that his country is working to stabilise world oil prices but consumer countries must contribute to this effort by reducing fuel taxes.
It was seen as doing little to reassure traders who do not believe that the forthcoming meeting of the Organisation of Petroleum Exporting Countries (OPEC) which meets on Sunday to consider a third output boost for the year, will affect the position. OPEC members deny that there is a shortage of crude oil, instead urging governments of consuming countries to cut taxes in an effort to bring down consumer prices.
