Oil prices starting to fuel inflation, economists warn

Consumers western countries have escaped sharp inflation until now despite the latest oil shock, but might have to deal with higher prices soon if the cost of crude remains at or near peak levels, economists warn.

German figures released on Monday showed a surprising jump of 2.5 percent this month on a 12-month basis, compared with 1.9 percent last month.

It was the highest increase in four years and was essentially the result of surging oil prices.

An for the 12-nation eurozone is expected today, and experts now forecast inflation of 2.3 percent following an increase of 2.1 percent last month.

In the US, consumer prices jumped by 0.5 percent last month from July, for a 12-month rate of 3.6 percent.

For Antoine Brunet, head strategist at HSBC CCF in Paris, the increases did not come as a surprise.

"We have had a large-scale oil shock, fully comparable with those in 1973 and 1979-1980. It would have been surprising if inflation had stayed in check," Brunet said.

Until however, that seemed to be the case, even though the most recent shock began in December 2003, he said, because several factors managed to ward off the effects.

Chinese kept prices down, while strong levels of productivity and unemployment kept labor costs in check. But oil prices could continue to climb -- from around US$65 at present, Brunet forecast crude at US$70 a barrel by the end of the year and US$90 by the end of next year.

And inflation that excludes volatile energy and food prices should also begin to rise owing to higher transportation costs, he said.

Hoger Fahrinkrug, an economist at the Swiss bank UBS, did not rule out eurozone inflation reaching 3.0 percent early next year, well above the European Central Bank's (ECB) medium-term target of close to but below 2.0 percent.

That would be much lower than in the 1970s, but was already enough to convince ECB chief Jean-Claude Trichet to call for "particular vigilance" regarding inflation.

Trichet to "the risk of a rise by the end of the year."

Resurgent would put the ECB back into its classic "growth/inflation dilemma" that had been shelved for the past two years, Brunet said.

The ECB has kept its key interest rate fixed at 2 percent since June 2003.

Meanwhile, the US Federal Reserve raised its main rate a week ago by a quarter point to 3.75 percent, even though many had hoped that it would wait in the aftermath of Hurricane Katrina. But Fed officials felt inflation was a real threat, a position with which many US analysts agreed.