As the ECB may increase interest rates to tackle inflation, the dollar is falling and the oil price is up

The German Bundesbank warned that the strong increase in food and energy prices could lead to high consumer price inflation in Europe’s largest economy. The Bundesbank said that “the price climate in Germany has become decidedly gloomier” and forecasted an average inflation rate of 3.0% in 2008 with upside risks in the short and medium term. The European Central Bank’s president Jean-Claude Trichet said that the ECB might raise interest rates in July and warns of a wage-price spiral in Europe.

These announcements and weak U.S. labor data caused the dollar fall further and the oil price to make its largest one-time gain and hit a new all-time record. The price of oil almost always goes up when the dollar loses value as oil exporting nations want to offset the devaluation of the greenback. Another factor which made the oil prices go up is the threat of a potential Israeli airstrike on Iran which is the fourth largest oil exporting nation.

The energy ministers of the G8 nations together with officials from China, India and South Korea met in Japan today and called for a hike in global oil production to avoid a global recession and even more painful effects on consumers and economies. The participants of the meeting agreed that the “era of cheap energy seems over” and that saving energy is the only way to decelerate the oil price increase. However, even stabilizing demand is out of reach with emerging economies’ demand outweighing lower demand from western countries fearing recession.


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