Euro zone inflation pressures are likely to persist as oil prices look set to remain high for a while, the European Commission said today.
In a quarterly report, it said the euro zone economy had been growing close to its potential in the first half of the year and would likely maintain that pace in the rest of 2004, with monetary conditions still conducive to recovery.
But it stressed there were no grounds for complacency, not least as a pick-up in sluggish domestic demand would be needed to compensate for a slowdown in exports that might be seen as higher energy costs crimp global growth.
Oil prices have hit record highs, with the price of a barrel of US light crude on Tuesday again climbing above $50, and the EU executive's report held out few hopes of a swift reversal.
"Recent developments in the oil market do not suggest a rapid decrease of oil prices and so associated inflation pressures are likely to persist for some time," it said.
It predicted the direct impact on inflation of higher oil prices would be compounded by indirect effects as producers pass on higher input costs into final prices - a trend already evident in recent producer price data.
Euro zone August producer prices rose by 0.4 per cent from July for an annual rate of 3.1 per cent, their fastest annual pace since 2001. Although consumer price inflation eased in September to an annual rate of 2.2 per cent from 2.3 per cent, it remains above the European Central Bank's target of keeping inflation close to but below 2 per cent.
Wage developments were a major source of uncertainty for the short-term price outlook as consumers could try to recoup lost purchasing power by demanding higher pay, the Commission said.
But it stressed this was not yet a problem as households had so far taken a benign view of recent inflation developments. "Higher oil prices have not led to an upward drift in inflation expectations."
The report said the euro zone economy had been growing close to its potential rate in the first six months of 2004, but warned a further acceleration was unlikely in coming months.
"While the higher growth prospects are of course welcome, there are no grounds for complacency," European Monetary Affairs Commissioner Joaquin Almunia said in a forward to the report.
"The recovery still looks relatively timid and unless growth accelerates further it would take a long time for the negative output gap to be closed and for employment creation to accelerate."