"The biggest worry for the ECB would be if the higher headline rate feeds into wage expectations, and that will become clear at the end of the year," says Axel Seidenberg, economist at Deutsche Bank Research in Frankfurt. Wage negotiations get underway in the autumn. That puts the ECB in a "wait-and-see" stance on its next rate move for the time being, says Mr. Seidenberg, who expects the bank to be able to keep rates steady until early next year. Joachim Fels, senior economist at Morgan Stanley Dean Witter in London, agrees that the reactions to a rising inflation rate pose a bigger threat than the price rises themselves, which mainly have been induced by the increase in oil prices.

"When a temporary increase in inflation feeds into expectations, wage unions will ask formore and companies will be more willing to give them more," he says.

Based mainly on the risk of such a "price-wage spiral," Morgan Stanley announced it was bringing forward to the first quarter of 2000 its forecast for when the ECB will first raise rates. The previous opinion was that the ECB would keep its main refinancing rate of 2.5% unchanged until later next year.

To be sure, economists say it's not clear how euro-zone wage unions will react. Wage pressures in the 11-country euro zone have been subdued by recent months of low inflation and increasing competition spurred in part by the Jan 1. introduction of the euro. But the sharp increase in oil prices complicates the picture, analysts say. "We are going to get more oil-price effects, and the ECB's main worry will be whether that will raise expectations on wages," says Adrian Schmidt, economist at Chase Manhattan in London. "But I think they are hoping that they won't have to get worried."

Confirming the impact of energy prices, Italy and SpainTuesday reported that producer prices increased more than expected in July, led by sharp gains in energy costs. Producer prices are seen as an advance indicator of inflation. The energy-price surge was also evident in the euro area's July annual consumer price increase of 1.1%, up from 0.9% in June.

But that in itself is no real cause for concern, economists say. "All of that pickup was because of higher energy prices," says Robert Prior-Wandesforde, an economist at HSBC Securities in London.

On Monday, departing Bundesbank president Hans Tietmeyer and his successor Ernst Welteke emphasized that they see no cause for worry on the price front. Mr. Welteke has a seat on the policy-making council of the ECB, who's main aim is to keep euro-zone inflation below 2%.

An array of factors reinforce the sanguine outlook on euro-zone prices: A recovering economy will likely boost productivity and bring down unit labor costs. The introduction of the euro has brought more price transparency and competition in theeuro-zone. Deregulation is under way in the European utilities sector. And, if the euro rises moderately as some expect, that would provide yet another deflationary force.

Nevertheless, the ECB has warned it will monitor inflation developments closely, and some economists believe it's far from certain the euro-zone will be able to match the U.S. record of low inflation amid booming economic growth. While the US recovery came at a time of low oil prices and weak global growth, Europe's upturn is accompanied by rising energy prices and an economic upswing in many parts of the world.

The Wall Street Journal