EUROPE - Jean-Claude Trichet, the president of the European Central Bank, today said the period of relatively high inflation rates will be longer than previously anticipated.

Speaking during a hearing at the Economic and Monetary Affairs Committee of the European Parliament, Trichet said since mid-December last year, inflation has remained at relatively high levels of above 3%, a trend which is likely to continue.

Trichet commented: "Looking ahead, the inflation rate is expected to remain significantly above 2% for most of the year. Hence, the period of relatively high inflation rates will be more protracted than previously expected.

Tom Elliott, strategist at JP Morgan Asset Management, commented: "Inflation does eat away at pension funds, particularly at those in fixed income."

He added equities are traditionally used as a hedge against inflation, "but it is not often as good a hedge in periods of high inflation, because in periods of inflation the cost of capital goes up, because interest rates are higher, and there is greater financial uncertainty."

In an interview with IPNederland, to be launched early next month, Else Bos, member of the executive board at PGGM, the investment managers of the €88bn Dutch pension fund PFZW, said inflation is a worry for the pension fund.

Bos told IPE she keeps a close eye on so-called 'stagflation' - stagnating economic growth but increasing inflation: "In this period, equity portfolios lose in value, while liabilities go up because of the inflation development. You have to endure such a period."

Elliot concluded however JP Morgan AM is not overly worried about the current upsurge in Eurozone inflation: "It is a concern the level at which it is, the current 3.3% is much higher than the 2% ECB target, but we do see this coming down perhaps later in the year."

Experts agree the upward pressure on inflation in the short-term mainly stems from the recent increases in energy and food prices, though Elliot thinks as the energy spike works its way "out of the numbers", inflation will start coming down in the autumn.

If you have any comments you would like to add to this or any other story, contact Carolyn Bandel on +44 (0)20 7261 4622 or email carolyn.bandel@ipe.com

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