Europe to Feel Effects of Oil Spike in '06 12.20.2005, 10:07 AM
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Europeans will feel the effect of the recent oil-price spike throughout 2006, the European Commission said Tuesday as it released its quarterly report on the 12 countries that use the euro currency.
It said prices of goods and services often feel the bite of an increase in oil prices after a time lag of six to 12 months.
"Indirect effects could exert significant upward pressures on core inflation through 2006 even if oil prices remain at their current level," it said.
The European Central Bank raised its key interest rate to 2.25 percent earlier this month, saying it wanted to keep prices stable as oil prices forced headline inflation up to 2.6 percent in September. Headline inflation eased back to 2.3 percent last month.
EU finance ministers spoke out against an interest-rate rise in November, saying core inflation had not moved and Europe was not seeing the followup effects of high energy costs such as demands for wage increases.
The Commission said weak labor conditions in most countries are dampening any wage demands fueled by wider price increases or better business conditions.
It confirmed that Europe's recovery is gaining momentum and the economy grew above potential in the second half of 2005.
The good news comes on the back of export growth but the Commission said the sources of growth were becoming more balanced as businesses become more confident and investment levels rise. However, consumer demand is still growing slowly.
It said the 12 countries that use the euro grew by 0.6 percent of gross domestic product in the third quarter.
