Jean-Claude Trichet and Inflation Pickup

European Central Bank President Jean-Claude Trichet said that the economy is faced with a “more protracted” period of elevated inflation than previously expected, signaling no imminent plan to cut interest rates to ease a credit squeeze in financial markets.

“The risks to price stability over the medium term are clearly on the upside,” Trichet told the European Parliament's economic and monetary affairs committee in Brussels.

"The ECB's governing council stands ready to counter upside risks to price stability.”

European inflation accelerated last month by 3.1 percent, the fastest pace since May 2001 as food prices soared. The risk that inflation will remain above its target of just below 2 percent is preventing the ECB from following counterparts in the U.S., U.K. and Canada in reducing the costs of borrowing.

A surge in prices for food and oil have created a “strong upward” effect on inflation, which would build if wages and other costs rise to compensate, Trichet said.

Trichet also repeated that the ECB expects consumer prices to grow 2.1 percent next year after 2.5 percent in 2007.

“To anchor inflation expectations with price stability is important,'' Trichet said.

At the same time, the risks to economic expansion lie to “the downside,” surrounded “by a high level of uncertainty,” Trichet said.