Euro inflation at 4 percent; highest in 16 years

Yearly inflation in euro nations hit a record 4 percent in June, the EU statistics agency Eurostat said Monday, adding pressure on the European Central Bank to raise borrowing costs even as the economy slows.

ECB officials have signaled they may hike their key interest rate on Thursday from 4 percent to 4.25 percent to try to cool prices — although that would raise costs for home buyers and companies seeking credit, further slowing the economy.

It may also weaken the dollar by encouraging investors to seek higher returns by placing funds in higher-interest euro currency accounts. That could send oil prices, which hit a record above $143 per barrel Monday, higher as well.

ECB President Jean-Claude Trichet has insisted that keeping prices stable is his main task and the bank doesn't face a trade-off against economic growth or job creation. That way of thinking does not fit this current wave of inflation, he said last month.

Instead of indicating an overheating economy, inflation — now running at the highest level in 16 years — seems to be acting as a brake on Europe's economy as shoppers steer clear of major purchases.

Trichet has said repeatedly that his priority is to limit price volatility in the longer term, but has suggested the bank doesn't plan a series of increases.

Dutch merchant bank NIBC sees inflation at 4.5 percent by the end of the year, saying it believed the central bank was wrong to warn against further rate hikes.

An ECB rate change on Thursday would be the first since last June, in stark contrast to aggressive action by the Bank of England and the U.S. Federal Reserve.

Oil prices have quadrupled in the last seven years, hitting Europeans hard because they also pay heavy taxes on fuel that can cost them some 80 euros ($126) per tank.

After hitting $143.67 per barrel in electronic trading on the New York Mercantile Exchange, oil prices were steady around $142.41.

Inflation is fast becoming a political headache across Europe as workers call for more pay and fishermen and truck drivers protest, sometimes violently, that surging fuel prices threaten their livelihoods.

The EU's top economy official, Joaquin Almunia, said inflation had shot past his forecasts and increasing prices would have social and economic consequences." He warned that the euro currency was now "overvalued."

The 15-nation currency fell to $1.5745 in late European trading, down from the $1.5775 it bought in late New York trading on Friday.

But EU spokeswoman Amelia Torres told reporters that authorities had to take care not to send prices even higher by granting wage increases that would trigger a price spiral beyond the current "uncomfortably high" rate.

Ground staff at German airline Lufthansa AG have gone on strike seeking a 9.8 percent pay increase while British public sector workers voted to strike for a 6 percent wage hike to keep pace with soaring inflation.

These demands come as the European economy slows sharply after a recent expansion cut jobless rates to record lows and reaped record profits for major exporters.

Businesses and consumers are gloomy about their future prospects with confidence in the 15 nations that share the euro dropping to a near three-year low in June.

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On the Net:

Stop Trichet web petition: http://www.stoptrichet.com

European Central Bank: http://www.ecb.int