Inflation in Europe unexpectedly accelerates

European inflation unexpectedly accelerated to the fastest in more than two years in March as European Central Bank policy makers prepared to raise interest rates to fight increasing price pressures.

Inflation in the 17-nation euro region quickened to 2.6 per cent from 2.4 per cent in February, the European Union’s statistics office in Luxembourg said today in an initial estimate. That’s the fastest since October 2008 and exceeds the European Central Bank’s (ECB’s) 2 per cent limit for a fourth month. Economists forecast inflation to hold at 2.4 per cent, a median of 32 estimates showed.

ECB President Jean-Claude Trichet earlier this month called for “strong vigilance” on price increases, signaling that the bank may raise its benchmark interest rate in April from a record low of 1 per cent. The German economy, Europe’s largest, has driven the region’s expansion as companies boosted hiring and output, helping offset the impact of surging energy costs and tougher austerity measures in countries such as Spain.

“April is a done deal for the ECB and today’s release adds to that view,” said Nick Kounis, chief European economist at ABN Amro Bank in Amsterdam. “Beyond April, there will be a gradual pace of rate hikes. Headline inflation is going to be comfortably above 2 per cent for the whole of this year.”

The euro gained against the dollar after the report, trading at $1.4205 at 1.07 pm in Frankfurt, up 0.6 per cent on the day.

Crude oil prices have surged 15 per cent this year as output from Libya slumped. An armed conflict between Libyan leader Muammar Gaddafi’s troops and rebel forces has forced companies including Total and ConocoPhillips to suspend operations and evacuate staff. Crude was trading at $105.30 a barrel today.