Euro switch fuels stagflation fear

THE spectre of stagflation stalked Continental Europe today after latest figures showed inflation well above target at a time when growth remains sluggish. Inflation across the 12-nation euro zone averaged 2.4% in April, comfortably breaching the European Central Bank's 2% ceiling. In April alone, consumer prices shot up by 0.5%.

Eurostat, which compiled the data, said price increases from the changeover to euro notes and coins were 'likely to persist for some time yet', adding that consumers' perceptions of higher prices were 'well founded' although limited to daily staples such as bread. It estimated that the changeover added about 0.16 of a percentage point to inflation in the first quarter.

Economist Geoff Dicks at Royal Bank of Scotland said: 'The ECB will struggle to get to its target this year. But it would be mad to raise interest rates, given the economy is growing at an annual rate of about 1%.' The ECB sets rates, currently 3.25%, on 6 June.

The data comes a day after Germany's engineering sector won a 4% pay rise.