Inflation in the eurozone soared to record highs this month, dealing another severe blow to hopes for an early cut in interest rates to underpin growth in the 15-nation bloc.

The latest leap in price pressures, believed to have been driven by the surging world cost of food and energy, drove the headline measure of eurozone consumer price inflation to a new peak of 3.5 per cent in March, up from 3.3 per cent in February, according to an early “flash” estimate.

With inflation stuck firmly above the European Central Bank’s target of “close to, but under 2 per cent”, the news further sharpened its dilemma over how to respond to increased risks to eurozone prospects. It sparked renewed warnings from economists that any rate cuts from the ECB remained some way off.

“I think the flash estimate for eurozone inflation probably confirms the worst European Central Bank fears,” said Matthew Sharratt, of Bank of America, said.

“Certainly this inflation data is of huge concern. It seems to suggest that there is not going to be a meaningful rate cut debate over the next couple of months. Over the next couple of months I don't see much shift in the ECB's stance.”

Market expectations that the ECB may delay any rate cuts beyond June, when some economists had tipped a first cut to materialise, gave a further boost to the already record-breaking strength of the euro, which is jeopardising the export-led growth of the big eurozone economies.

In morning dealing today, the euro rose as high as $1.5824, only two thirds of a cent short of its record highs set two weeks ago, although it later lost a little ground to levels close to $1.58. The euro was also pushed to a new all-time high against the pound, at 79.72p.

The ECB’s reluctance to cut rates in the face of high levels of headline inflation is being reinforced by its fears that strong price pressures will trigger so-called “second-round effects”, with rising living costs leading to inflationary wage demands and price increases by businesses that would further stoke inflation.

“The ECB is particularly concerned that pay settlements could be markedly higher across the eurozone, as a consequence of headline inflation rising to new highs,” Howard Archer, economist at Global Insight, said. “This would raise the spectre of a damaging wage-price spiral developing.”

The Frankfurt-based central bank saw some relief from those concerns yesterday as the latest European Commission survey showed that eurozone consumers expectations of future inflation — a key factor that could stoke wage demands — fell back a little this month, for the first time in five months.

The survey’s index of expected future inflation fell to an index reading of 26, from 28. Price expectations among producers also fell, to an index of 13, from 14 — the first fall for six months.

However, the Commission’s regular barometer of sentiment of economic prospects among households and businesses showed a further deterioration in confidence. Its headline measure of sentiment over the outlook fell to 99.6, from 100.2

Detailed breakdowns showed that consumers’ optimism was unchanged, but that sentiment in the services sector fell a little.

The ECB’s worries over inflation will not be eased, meanwhile, by separate figures showing that money supply in the eurozone remains strong. Headline annual growth of M3 money supply dropped only a little in February data, to 11.3 per cent, from 11.5 per cent in January. Private sector lending growth remained strong at 10.9 per cent.

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