The monthly HICP has finally done it. It has moved up 3% and the ECB is stuck on the horns of a real dilemma. Prices are zooming up across the Euro area and most of it is oil. But 3% is a long way from 2%, the ECB’s oft stated limit for inflation. And the inflation rate shows a steady acceleration in recent months: a 5.8% rate over three months, 3.6% over 6 months 3% over 12 months… A year ago inflation was at 1.9% Yr/Yr. Now it is at 3% and pressing higher. Germany and Italy also with topical inflation reports available (Nov) show the same pattern and same ugly development.

If the ECB makes any more excuses it will look like that old three-stooges skit where the boys dare a muscle-bound bully to cross this line in the sand then keep redrawing it as he steps over it before they turn and run away. Nice image, eh?

Not only is inflation flaring on the headline but the core has been less than well behaved and money and credit growth have been excessive for so long that even the three stooges skit seems an inappropriate analogy by comparison.

The ECB has its back against a very uncomfortable wall and its bare feet on very hot tin roof. It is worried about second round inflation taking hold as first round inflation is stubbornly – and now chronically - well past its barrier. And Europe has the excessive liquidity to make that fear of second round effects real… but it also has the euro so strong that economic growth already is being undercut.

Welcome, Mr. Euro, to the realm of the reserve currency unit. This is exactly the sort of dilemma we have warned that Europe is not ready to face. And now it is front and center. The problem with being a reserve currency is that those hot little capital flows don’t always come when you want them. Those economic hot flashes can create trouble. Now Europe is on the brink of hiking rates and creating another episode of euro strength at a time it isn’t really needed or desired. The envelope please, Mr Trichet…