European inflation pressures recede, and could help U.S.

The European Central Bank (ECB) shifted away slightly from an inflationary guard on Thursday, as the bank suggested the possibility of reducing interest rates later this year to help spur growth. A European interest rate cut could, some economists say, help reduce U.S. inflation.

As expected Thursday, the central bank’s Governing Council left its benchmark interest rate at 4.25%. But statements by ECB President Jean-Claude Trichet focused on declining economic growth.

“Economic activity in the euro area is weakening with contracting domestic demand and tighter financing condition,” Trichet said. “The economic outlook is subject to increased downside risks.”

In a CNNMoney.com article, editor Paul La Monica wrote,

Although the U.S. economy is in bad shape now, the fact that Europe’s economy is also taking a hit, could help alleviate some of the inflation pressures that have taken a big bite out of consumers’ wallets this year.

Why? Should the ECB lower rates in an attempt to stimulate European economies, the US dollar is likely to benefit with stronger gains against the euro and other currencies. That would reduced costs of imported goods, like oil and other commodities.

In the same article, Yanick Desnoyers, senior economist with National Bank Financial in Montreal, was quoted as saying,

“The fact that the dollar is increasing again is good news regarding import price inflation,” he said. “It is easier to control inflation when your currency is rising.”

Desnoyers predicts oil could fall as low as $80 per barrel over the next year. Lower commodity prices on their own can greatly impact inflation.

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