Eurozone inflation reaches record 4%

Eurozone inflation leapt to a record four per cent last month, the EU statistics office said on Monday, cementing expectations that the European Central Bank will raise interest rates when it meets tomorrow.

"We think a hike this week is a done deal," said Stephane Deo, chief European economist at UBS bank.

"It's a bit of a shocker," said Gilles Moec, an economist at Bank of America who like many others had predicted a marginally lower figure of 3.9 per cent for the annual inflation rate.

The inflation-fighting ECB holds a meeting of its Governing Council tomorrow and is widely expected to raise its key interest rate to 4.25 per cent from four per cent, even though the economy appears to be slowing markedly.

Last month's inflation rate of four per cent year-on-year compared with 3.7 per cent in May and marked a further departure from the ECB target of just below two per cent for medium-term inflation.

Eurozone interest rate futures extended falls and short-dated bond yields rose after the data.

Jean-Claude Juncker, chief spokesman for finance ministers of the euro zone, said he was sure the ECB would do the right thing.

"It's the highest we've experienced in a decade and a half. I have to repeat that inflation is not only of concern to the ECB ... it's a matter for governments too," Mr Juncker, who is also prime minister of Luxembourg, told reporters.

European Economic and Monetary Affairs Commissioner Joaquin Almunia repeated calls for moderation in wage demands, saying restraint was the only way to prevent the spread of inflation, which is so far mainly driven by high food and fuel prices.

Oil prices set a new record on Monday at more than $143 per barrel, offering little sign of quick respite.

"Medium-term inflation expectations are increasing. The recommendation is wages should go up in line with productivity, that is the best way to retain purchasing power," Mr Almunia said during a hearing at the European Parliament.

So far, such second-wave effects as he described them were "almost imperceptible".

ECB President Jean-Claude Trichet defended the central bank's focus on inflation, saying price stability was vital for growth and job creation.

June's inflation figure was the highest since measurements started in 1997 and Mr Trichet has already taken the unusual step of saying weeks ahead of time that a rate rise was possible at this week's meeting.