April 16, 2011
Inflation across the euro bloc surged at a record monthly rate in March, fueling expectations that the European Central Bank's recent interest-rate increase will be the first of many as officials scramble to keep higher commodity prices from rippling through the economy.
Unlike in previous months when inflation was largely driven by food and energy, March's increase was fueled by other prices, particularly apparel, an indication that businesses are increasingly able to pass along their own cost increases to consumers, in what economists call "second-round" effects.
The inflation report lent some support to the euro Friday despite a downgrade by Moody's Investors Service of Ireland's government debt to near-junk status. Expectations of higher interest rates tend to increase a currency's value.
Higher borrowing costs and the rising euro weigh heavily on countries outside Europe's stronger core, further widening the continent's economic divide.
Moody's cited ECB rate increases, as well as the stronger euro, in its downgrade of Ireland. "The Irish government's financial strength may suffer as a result of what may be the first of a series of policy rate increases by the European Central Bank to slow the rise in euro area inflation," Moody's said.
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