BERLIN -- Intensified global inflation pressures since the start of this year, combined with slowing growth, have put central bankers in a bind about how to keep prices in check without tipping their economies into recession.
The latest batch of inflation figures underlined the problems facing central banks as they try to tailor their policies to coax forward economic growth while keeping price pressures under control.
In Europe, annual EU-harmonized inflation held in February at 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 its already very low rates 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.
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"In a nutshell, 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 fail to consider the dangers of higher inflation.
Across the Atlantic, a widely watched gauge of U.S. inflation pressures, the core personal consumption expenditure price index, or PCE, was expected to rise 0.3 percent in January after a 0.2 percent gain in December.
The PCE data was due at 8:30 a.m. EDT on Friday.
NO U.S. "STAGFLATION"
Federal Reserve Chairman Ben Bernanke said on Thursday the United States was not headed toward 1970s-style "stagflation" but acknowledged inflation could complicate the central bank's effort to spur the economy.
Central banks in leading global economies are battling with the problem of how to support their economies, which are reeling from the knock-on impact of the U.S. subprime-mortgage crisis, while at the same time taming inflationary pressures.
In updated economic forecasts released last week, the U.S. central bank lowered its outlook for 2008 growth by a half point to between 1.3 percent and 2 percent, citing the prolonged housing slump and bottlenecks in credit markets.
In Japan, much stronger-than-expected housing construction and household spending data released on Friday eased some concern that Japan may follow the United States into recession.
The Japanese central bank has been looking for inflation to return after years of battling deflation.
"The price trend will be similar in all developed countries. Inflation is high at the moment, but it will ease in the future," said Yoshimasa Maruyama, an economist at BNP Paribas.
In Europe, the ECB's task has been made harder by a series of above-inflation pay demands from trade unions in Germany, the region's largest economy, which the central bank fears could spark an inflationary spiral.
The central bank has said it is committed to preventing so-called second round effects — price rises shifting up inflation expectations and feeding into wage demands.
However, the ECB is also wrestling with a weakened euro-zone growth outlook. A business climate indicator for the euro zone, based on a survey of corporate managers, fell more than expected in February to its lowest level in two years.
"The latest euro-zone data provide further evidence of a slowdown in economic activity alongside strong price pressures," said Jennifer McKeown of Capital Economics.
CORE EURO ZONE INFLATION EASES
A breakdown of euro-zone January price data showed core inflation, which excludes volatile energy and food costs, eased to 1.7 percent in January from 1.9 percent in December.
"The fact that core inflation remains muted should give the ECB some leverage to start easing rates very soon," said David Brown, chief European economist at Bear Stearns.
The headline euro-zone inflation rate accelerated to 3.2 percent in January from 3.1 percent in December.
Wattret at BNP Paribas thought the ECB would soon look beyond the headline inflation rate and focus on the risks to growth in the euro zone, where a rise in the euro to a record high versus the dollar is making life hard for exporters.
"I'm expecting the first rate cut in June, and the reason is I think the economic and financial news flow will shock the ECB on the downside," Wattret said.
Most economists expect the ECB to cut rates from their current 4 percent by the end of June at the latest, according to a Reuters poll published on February 19.
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