Europe inflation seen surpassing US for first time in a decade

FOR the first time in over a decade, traders are anticipating faster inflation in Europe than the US as the war in Ukraine drives up energy prices.

Markets are expecting euro-area inflation of 3.02 per cent over the next decade, compared with 3.00 per cent for the US, according to swap contracts linked to consumer prices. The last time these rates flipped was in 2009 during the global financial crisis.

"Peak inflation is still ahead of us" in Europe, said Rohan Khanna, a strategist at UBS Group in London. He said US price pressures are expected to ease in the next few months as the Federal Reserve aggressively hikes interest rates.

It all makes for an uncomfortable situation for the European Central Bank, which has to balance the need to curb inflation with threats to economic growth. More economists are talking about a possible recession as the region grapples with a ban on Russian oil and the possibility of energy rationing.

So far, there's no indication that price pressures are slowing down. Data last week showed euro-area inflation climbed to a fresh all-time high, raising pressure on officials to remove crisis-era stimulus and lift interest rates.

European 5-year, 5-year inflation swaps - a measure of price increases over the second half of the next decade - still trail those in the US, suggesting longer-term expectations for price increases are more moderate. They are trading above the ECB's 2 per cent target at the highest since 2012. BLOOMBERG