At the beginning of this year, global inflation pressures increased, along with slower economic growth, leading central bankers to struggle with how to control prices without causing a recession. In the United States, despite the Federal Reserve cutting interest rates following a credit crunch last August, data from Friday revealed that underlying US inflation rose by 0.3 percent in January and the overall annual rate increased to 3.7 percent. In the euro zone, where the European Central Bank has not yet lowered rates like the Fed, preliminary data for several countries in February showed inflation remaining above the ECB's 2 percent target in major economies. Germany had an annual inflation rate of 2.9 percent, Italy had 3.1 percent, and Spain reached a record 4.4 percent. In Belgium, inflation rose to 3.64 percent, the highest rate since July 1991. In Japan, annual inflation remains at a high of 0.8 percent in January, leading to speculation that the Bank of Japan may lower rates from the current 0.5 percent due to signs of an economic slowdown. Ken Wattret, chief euro zone market economist at BNP Paribas, predicts uncomfortably high levels of headline inflation in the euro zone in the near future, putting the European Central Bank in a difficult position as economic growth weakens but inflation persists. European Central Bank Governing Council member Axel Weber warned against cutting interest rates from the current 4 percent due to the risks of higher inflation. Federal Reserve Chairman Ben Bernanke stated that the United States is not facing "stagflation" like in the 1970s, but acknowledged that inflation could complicate efforts to boost the economy. Friday's US core personal consumption expenditure price index, known as PCE, highlighted the conflicting pressures faced by central banks. On one hand, they need to support growth amidst turmoil in the banking sector due to losses on high-risk debt. On the other hand, they must also control inflation. The Federal Reserve, which has already reduced interest rates by 2.25 percentage points to 3 percent since September, is expected to continue cutting rates. Despite signs of increasing inflation, experts believe that the Fed will still lower rates. The Fed recently revised its economic forecasts, lowering its growth outlook for 2008 due to the housing market decline and credit market issues. In Japan, unexpectedly strong housing construction and household spending data released on Friday alleviated concerns about a recession following in the footsteps of the United States. The Japanese central bank has been struggling to combat deflation for years, but now they are hopeful that inflation will make a comeback. Yoshimasa Maruyama, an economist at BNP Paribas in Tokyo, believes that inflation will eventually ease in developed countries. In Europe, the ECB is facing challenges due to high pay demands from trade unions in Germany, which could raise inflation expectations and lead to more wage demands. Additionally, the ECB is concerned about the weakened growth outlook in the euro zone. A survey of corporate managers in the euro zone revealed that the business climate indicator fell more than anticipated in February, reaching its lowest point in two years. Core inflation in the euro zone, excluding energy and food costs, decreased to 1.7 percent in January from 1.9 percent in December. The preliminary euro zone inflation rate for February is expected to remain at 3.2 percent, giving the European Central Bank room to potentially lower interest rates. Chief European economist at Bear Stearns, David Brown, believes that the subdued core inflation rate could lead to rate cuts in the near future. Despite this, the headline inflation rate in the euro zone rose to 3.2 percent in January from 3.1 percent in December. Wattret, an analyst at BNP Paribas, believed that the European Central Bank (ECB) would shift its focus from the headline inflation rate to the risks of economic growth in the euro zone. The euro's increase against the dollar has posed challenges for exporters. Despite most economists in a recent Reuters poll predicting two rate cuts by the ECB this year, they now think that an immediate action is less probable due to the persistence of high inflation rates.