A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.



Euro price pressures at 25-mth high

European Central Bank President Jean-Claude Trichet said on Friday he saw no danger of inflation taking off in the euro zone, dismissing any concerns about rising price pressures in the currency area.

Trichet made his comments after data earlier this week showed euro zone inflation rose 2.2 percent year-on-year in December, exceeding the ECB's target for the first time in two years.

Inflation expectations also surged in the last month of 2010, and a forward-looking indicator from the Economic Cycle Research Institute showed inflationary pressures built up to a 25-month high in the euro zone during November on the back of upturns in Germany and France.

But Trichet said all indicators pointed to price stability being secured "for the foreseeable future too".

"Europe has not become an inflation community and it won't become one," he said in the text of his speech to a Bavarian Conservative Party event in southern Germany.

"The euro is a stable currency, as stable as its most stable predecessor currencies, including the D-Mark," he said.

Germany's labour minister said in comments published earlier this week that she expects wages will rise "considerably" in the euro zone's largest economy this year.

The ECB held its main rate at 1 percent for the 19th month in a row in December. Raising rates now to cool price pressures in Germany is the last thing peripheral euro zone economies need as they battle with a sovereign debt crisis.

A Reuters poll of economists released on Thursday showed the ECB holding rates at 1.0 percent until the fourth quarter, during which they see a 25 basis point hike -- a quarter sooner than forecast in December's long-term economy poll.

Trichet also called for governments to consolidate their finances and added the European Union budget rules should be stricter than those proposed by the Commission.

"We have to make a quantum leap in our economic governance," he said. "It is time to strengthen the code of conduct for national governments, notably the Stability and Growth Pact."