Inflation above ECB comfort zone in top economies backs hike

[BRUSSELS] Inflation stayed well above 2 per cent in the eurozone’s four top economies, backing the case for the European Central Bank to raise interest rates for the first time since 2023.

Propelled by the war-induced surge in energy costs, May readings for France, Italy and Spain quickened to 2.8 per cent, 3.3 per cent and 3.6 per cent, data on Friday (May 29) showed. While moderating in Germany, the headline number of 2.7 per cent held far beyond the ECB’s comfort zone.

The reports will help ECB officials understand how much the conflict in the Middle East is stoking prices, and whether they need to respond. Markets are all but sure they will, maintaining bets on a quarter-point hike next month and another by year-end.

Somewhat softer inflation in Germany is unlikely to deter policymakers from tightening given it reflects a temporary reduction in value-added taxes on fuels and cheaper food.

Without those two categories, price pressures intensified, while a separate poll by the Munich-based Ifo institute showed a large share of firms still plans to pass rising costs on to clients.

A reading of consumer-price increases for the 21-nation eurozone will be published next week, with economists predicting a push further beyond the 3 per cent level reached in April.

ECB officials from hawkish executive board member Isabel Schnabel to dovish chief economist Philip Lane are signalling borrowing costs must probably rise. Lithuanian central-bank head Gediminas Simkus even speculated on Friday that two hikes may be needed.

Having opted against tightening in April, officials nevertheless determined that some second-round inflation effects were “inevitable,” according to an account of the meeting, with the key issues being their extent, magnitude, timing and duration.

“It had become increasingly likely that adopting a ‘looking through’ approach was not appropriate,” the account said. “It was argued that this situation shifted the primary focus to determining the most appropriate timing for a rate increase.”

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There are concerns about the Iran war’s drag on economic expansion, which could in turn pull down inflation. Separate data on Friday showed France contracted at the start of the year as consumer spending and business investment both fell. Indicators of more recent activity also point to a slowdown, while confidence gauges have continued to deteriorate.

In Italy, though, first-quarter growth was actually revised higher, with all demand components, from consumer spending to investment and trade, showing improvements.

Italy’s central-bank chief, Fabio Panetta, acknowledged the case, saying in Rome that the outlook seems to call for a recalibration of the monetary policy stance to counter the risk of persistent inflationary tensions.”

Katharine Neiss, chief European economist at PGIM, sees the eurozone picture “relatively contained,” with price gains peaking in the summer at about 3.5 per cent, far from the double-digit peak they hit in 2022. She worries more about growth.

“On the real activity side, I think you are seeing some amber warning lights already,” Neiss told Bloomberg Television on Friday. BLOOMBERG