MercoPress. South Atlantic News Agency

Trichet warns Euro nations of inflation price spiral

European Central Bank President Jean-Claude Trichet warned Wednesday that Euro nations are already seeing the first signs of an inflation price spiral and called on governments to help contain wage hikes that could fuel further price rises.

ECB governing council "is strongly concerned that price and wage-setting behavior could add to inflationary pressures" Trichet told the European Parliament. He said current inflation levels were "worrying" and warned they were set to stay high before cooling gradually next year. The ECB president said indexation schemes in some EU nations which tie wages automatically to price rises were of "particular concern and should be avoided". Annual inflation in the Euro area jumped to 4% in June, the highest in 16 years of keeping records. That prompted the ECB to hike borrowing costs last week for the first time in a year to 4.25% from 4%. Meanwhile, the EU statistics agency Eurostat lowered its estimate of economic growth in the 15 nations that share the Euro to 2.1% for the first three months of 2008 from a year ago. Its earlier estimate was 2.2%. The Euro economy expanded only slightly more slowly than in the fourth quarter of last year when it grew 2.2%. In his remarks in Strasbourg, Trichet expressed concern that some Euro-zone governments adding to the risk of economic instability by failing to sticking to commitments to keep budget deficits low. He defended the decision to raise rates and his calls for wage restraint. He said containing inflation was essential for a long-term economic recovery. "Price stability paves the way for sustainable growth and job creation" he told the assembly. "The most vulnerable and poorest of our fellow citizens are those that would suffer most" from persistent inflation, he insisted. Many EU lawmakers defended the bank and praised Trichet for resisting government pressure from governments.