The European Central Bank (ECB) stressed the need for strong vigilance against price pressures in its monthly bulletin today and released a new survey that showed an upward shift in inflation expectations.
Consumer prices are seen rising by 2 per cent in 2006, according to the latest survey of professional forecasters - up from 1.8 per cent three months earlier.
The ECB said the survey also shows the balance of inflationary risks has clearly shifted towards higher outcomes.
The probability that inflation next year will be in a 2 to 2.4 per cent range rose to 44 per cent, which would put it firmly above the ECB's 2 per cent ceiling for price stability, compared with a 29 per cent probability in the third quarter.
"Given recent developments in oil and petrol prices, the short-term outlook for inflation has deteriorated significantly, and euro area HICP inflation is expected to remain above 2 per cent in the coming months," the bulletin said.
The survey threw fresh light on why the ECB has toughened its anti-inflationary stance in the past month, with ECB President Jean-Claude Trichet warning the central bank stands ready to raise interest rates any time if signs accelerate of prices rising broadly throughout the 12-nation region.
However, the ECB said the latest indicators do not point to a strengthening of underlying domestic inflationary pressures and that longer term, the inflation outlook remains under control.