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Business

European Inflation Hits Highest Level Since Euro Launch

Official EU data released Monday, March 31, showed inflation in the 15 euro zone countries surged in March to the highest level since the single currency bloc was formed in 1999.

The Euro sculpture in front of the European Central Bank in Frankfurt

Inflation in the euro zone hit the highest level since the single currency was launched

The European Central Bank's task of keeping a lid on soaring inflation while also helping to keep the euro-zone economy from falling into a rut became more complicated Monday when the European Union's Eurostat data agency said in an initial estimate that 12-month inflation in the euro zone jumped to 3.5 percent in March.

The figures showed an increase from the 3.3 percent recorded in February and were slightly above economists' forecasts for 3.4 percent.

At the same time, Germany announced that its inflation spiked to 3.1 percent in March from 2.8 percent in February with the gain driven by higher food and oil prices. German inflation hit 3.2 percent in November last year which was its highest rate since 1994.

The statistics office data, based on six key German states, showed that food costs climbed 7.3 percent on a 12-month basis, while non-alcoholic drinks gained 9.6 percent. Some fuels rose by as much as 44.3 percent. The Federal Statistics Office is scheduled to present a comprehensive report on April 16.

Germans could expect still higher prices down the line, with several providers of electricity planning a new hike in prices in April.

The pick-up in consumer prices in Europe's biggest economy raises the prospects of inflation in the 15-member euro zone again overshooting the European Central Bank's 2 percent annual inflation target.

Inflation expected to stay high during 2008

A food market in Germany

Food prices in Germany rose by over 7 percent

Last week, analysts forecasted euro zone inflation would remain at about 3.0 percent for much of 2008 and only begin to ease off in the second half of the year. Many agreed that the likelihood of an interest rate cut by the European Central Bank in the next few months was decreasing in light of growing price pressures.

According to experts, the increase in March was due partly to a renewed increase in core prices, a worrying sign that inflation could be deeper rooted than in recent months.

The record inflation came as confidence in the euro-zone economy fell more than expected in March, hitting the lowest level in nearly two and a half years, according to a survey from the European Commission.

Its economic sentiment indicator for the euro zone fell to 99.6 points in March from 100.2 in February, hitting the lowest level since November 2005 and falling short of economists' forecasts for 99.9 points.

The European Union's executive arm blamed the bleaker outlook on weaker confidence in the services and construction sector while consumer confidence held steady.

"This heightens concern about the strength of euro-zone domestic demand going forward, while exports are coming under increasing pressure from a deteriorating global economic environment and a record high euro," economist Howard Archer at consultants Global Insight said in an interview with AFP.

Despite the weakness in the euro zone's outlook, confidence in the economy of 27-nation European Union rose to 102.0 points from 100.3, boosted by an improvement in British services sector, the commission said.

Germany records slight upturn in confidence

A stock dealer reacts in front of the German stock index (DAX) display at the Stock exchange in Frankfurt, Germany

Germany's wavering economic confidence is slightly up

At the national level, European powerhouse Germany saw a slight improvement in overall economic confidence while the French outlook remained largely stable.

However, the Netherlands, Spain and Italy all saw sharp deteriorations in the outlook for their economies while Britain enjoyed surging confidence in the face of major financial market turmoil and tight credit conditions.

Despite the darker euro zone outlook, the commission said that its separate business climate indicator for the bloc improved in March, rising to 0.80 points in March from 0.71 in February and halting a three-month decline.

"The relatively high level of the indicator points to sustained industrial production growth in the first quarter of this year," the commission said.

Rising food and energy costs resulted in consumer prices in Germany edging up to 3.1 percent in March, data released Friday showed.

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