Eurozone inflation eases in February but core prices surge

EUROZONE inflation fell less than expected last month and underlying price growth surged, reinforcing the case for the European Central Bank (ECB) to keep raising interest rates at a brisk pace, data from Eurostat showed on Thursday (Mar 2).

Consumer price inflation in the 20 countries sharing the euro currency eased to 8.5 per cent in February from 8.6 per cent a month earlier on lower energy prices, but still came in above expectations for 8.2 per cent in a Reuters poll of economists.

Although overall inflation is well below its double-digit highs in October it continues to broaden, fuelling fears the earlier surge in energy prices has seeped into the economy via so-called second-round effects, making price growth even more difficult to root out.

Indeed, underlying inflation, which filters out volatile food and fuel prices, an indicator closely watched by the ECB, jumped to 5.6 per cent from 5.3 per cent, coming well above expectations for a steady reading.

The ECB has promised another half a percentage-point rate hike for Mar 16 to fight inflation but grim data is already shifting the debate to subsequent meetings as markets continue to raise their best for just how high the ECB will need to go.

Investors now see the ECB’s 2.5 per cent deposit rate rising by a combined 100 basis points in March and May, then to around 4.1 per cent at the turn of the year as markets have priced in an extra 50 basis points of hikes in just the past month.

Market pricing has moved up so much, some even see a risk the ECB would hike by more than 50 basis points this month, despite its explicit guidance, which has been repeatedly confirmed, most recently by ECB chief Christine Lagarde on Thursday.

The problem is that underlying inflation is a leading indicator on the durability of price growth and its stubborn rise suggests that getting the headline rate down to the ECB’s 2 per cent target may be protracted.

Price growth in services, the biggest component in core inflation, accelerated to 4.8 per cent from 4.4 per cent, a big worry since the sector is especially sensitive to wage growth and the rise suggests an acceleration in labour costs.

SEE ALSO

Eurozone bond yields hit new multi-year highs

ECB posts loss as it pays price for its own rate hikes

Industrial goods inflation meanwhile picked up to 6.8 per cent from 6.7 per cent while unprocessed food price growth surged to 13.6 per cent from 11.3 per cent.

Bundesbank president Joachim Nagel has already argued that the recent fall in energy prices only lower short-term inflation and does not improve medium-term prospects, so the ECB may need to opt for another large rate hike in May.

His concerns have been shared by several prominent conservatives, including ECB board member Isabel Schnabel and Dutch central bank chief Klaas Knot, suggesting that the ECB’s hawkish majority is not about to back off.

Still, Lagarde argued that disinflation will pick up speed from next month as surging gas prices at the onset of Russia’s war in Ukraine get knocked out of base figures.

Still, markets are doubtful and a longer term indicator of market-based inflation expectations jumped to 2.5 per cent on Thursday, a rise of nearly 25 basis points in six weeks. REUTERS