Eurozone Inflation Jumps the 2% Barrier

Friday, September 28, 2007

Higher pasta prices in Italy, petrol for 1.20 Euros and much more per litre, espresso shots for 4 Euros and double-digit raises for communal and federal services finally show up in the Eurozone's official inflation rate - which is laughed at at best in Europe.
A first estimate of Eurostat arrived at an annualized inflation rate of 2.1% in September after 1.7% in August.

ECB Pumps Up Markets With Another 50 Billion
It won't get any better. Surging food and energy prices are complemented by fresh money from the ECB. According to data on its website the ECB created another 50 billion Euros in a 3-month repo that drew an average weighted rate of 4.63%, significantly above its target rate of 4%.
Don't expect to find information on the volume of bids on the site of the "transparent" ECB, which also did not announce this repo beforehand to the wider public. This new transaction reverses almost half of the drain of 114 billion Euros last week. Money created solely for the purpose of supporting unsupportable securities prices.

Central Banks Fooling the Public
It is amazing that central banks appear to be one-trick ponies that try to douse the fire with gasoline. All that new money - and not a single unit of service or product created. Do central banks really believe the public can be fooled much longer with wads of paper?
Fiat money is the cheapest product in the world. Just go to Zimbabwe, the country of starving millionaires.
Well, the game will go on as long as the general public buys into the ridiculous official inflation rates which are completely out of sync with consumers daily experiences at the cash register.
Based on these unreal inflation rates central banks fix interest rates at levels that are below actual inflation.

The ECB's Dilemma
The ECB is in a big dilemma. Its monetary policy is currently failing. Inflation is above the target rate of 2% and M3 has been ignored in all policy decisions since the inception of the Euro. M3 currently grows at 11.7% annually, more than double the target rate of 4.5%.
While these indicators would justify a rate hike, such a move could push Europe into a recession. Export oriented economies like Germany fear any further advances of the Euro. France, Spain and Italy are on the brink of a recession already. Any rate hike would burden budgets further.
Taking clues from a speech by vice president Lucas Papademos the ECB will probably sit on its hands at the next council meeting as the turmoil in capital markets is still being evaluated. It will also depend on others. Papademos said the ECB holds close contact with the Federal Reserve, raising my suspicion that exchange rates will see huge distortions.
I should also emphasise that ... the ECB and the Eurosystem have been in close contact with other central banks in the world, notably the Federal Reserve System. While each monetary authority took decisions to attain its own objectives and in line with its own assessment and operational framework, it is unquestionable that this liquidity squeeze which had manifestly global dimensions called for a response with commensurately global cooperation.
I uphold my statement that precious metals will prove to be the best currencies in the near future - as they have been in the past 6000 years. Gold reached a new 28-year high today at $745 per ounce.

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