Global inflation rise puts central banks in a fix

By Paul Carrel

BERLIN (Reuters) - Global inflation pressures intensified at the start of this year, combining with slower growth to put central bankers in a bind about how to keep prices in check without tipping their economies into recession.

In the United States, where the Federal Reserve has slashed interest rates since a global credit crunch gripped the economy last August, data on Friday showed the Fed's favored gauge of underlying U.S. inflation rose by 0.3 percent in January after a 0.2 percent gain in December, while the overall annual rate rose to 3.7 percent from 3.5 percent.

In the euro zone, where the European Central Bank has so far declined to follow the Fed's rate-cutting lead, preliminary data for several countries in February showed inflation holding well above the ECB's 2 percent target ceiling in major economies.

February inflation was running at an annual rate of 2.9 percent in Germany, at 3.1 percent in Italy, and at a record 4.4 percent in Spain. In Belgium, inflation jumped to 3.64 percent -- the highest rate since July 1991.

In Japan, annual inflation held at a decade-high 0.8 percent in January, but with other data pointing to an economic slowdown, the Bank of Japan was still seen potentially cutting rates from an already very low 0.5 percent this year.

Ken Wattret, chief euro zone market economist at BNP Paribas, said the euro zone was likely to see uncomfortably high levels of headline inflation in the coming months.

"The ECB is caught in a very awkward position, which is that the economic growth outlook is deteriorating, and deteriorating fast in my opinion, but inflation is not getting better quickly enough," he said.

European Central Bank Governing Council member Axel Weber said on Wednesday market expectations that the ECB will cut interest rates from the current 4 percent fail to consider the dangers of higher inflation.