By Scott Howard, Economist, Macroeconomics, RISI
BOSTON, MA, July 17, 2008 - The riders on this year's Tour de France have left the flat roads behind as they head into the mountain stages in the second week of the race. Sadly for European consumers, inflation has tracked a similarly steep path since the beginning of the year.
As a newcomer to the sport of cycling myself, I have a profound respect for the endurance and power it takes to make a steep climb. But, I joined the cycling ranks not just for the sport of it, but also for the same reason that headline CPI inflation in the euro area and across the globe is up: rising energy costs. Oil prices have increased by 50% so far in 2008 and reached $147 per barrel last week. Gas prices in the US are averaging $4.10 per gallon and the EU average is 5.28 euros per gallon or $8.40. This is motivation enough to hop on a bike.
These rising energy prices, along with high food prices, have resulted in euro area headline CPI inflation of 4.0% in June, which is up from 1.9% in June 2007 (all rates year-over-year). What is perhaps more worrying to European central bankers, however, is the recent evidence that rising energy and food costs have become more entrenched in inflation expectations.
This is evidenced by the increase in Eurostat's labour cost index (LCI), which measures the total hourly cost for employers. In 1Q08, the euro area LCI increased by 3.3% from the same period a year ago, which marks the fastest pace since Lance Armstrong won his fifth straight Tour in 2003. Spain, which is almost certainly headed into a recession, captured the maillot jaune from its larger euro area peers with a 5.7% increase.
This is an excerpt from a full story that is available in RISI's Pulp & Paper News Service.
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