Euro Area Inflation Unexpectedly Hits Record High One Day Ahead Of ECB Decision

The comments below are an edited and abridged synopsis of an article by Tyler Durden

Eurozone inflation came in hotter than expected at a record high, piling pressure on the ECB’s President Christine Lagarde to act instead of pretending Europe’s inflation is a transitory outlier that will magically normalize this year.

Euro Area Inflation Unexpectedly Hits Record High One Day Ahead Of ECB Decision - BullionBuzz - Nick's Top Six
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The cost of living in the Eurozone rose 19bps to 5.1% in January, despite expectations for a drop to 4.4% from December’s (previous record) 5%. Core inflation, excluding energy, food, alcohol and tobacco, fell 28bps to 2.34, just off recent all-time highs. Energy inflation and food, alcohol and tobacco inflation increased more than expected.

The breakdown by main expenditure categories showed that services inflation was stable at 2.4%, and non-energy industrial goods inflation fell 0.6pp to 2.3%. Of the non-core components, energy inflation rose 2.7pp to 28.6%, while food, alcohol and tobacco inflation rose 0.4pp to 3.6%. Both numbers were expected to decline.

Wider price pressures are stronger than expected. Although the non-energy industrial goods price inflation showed some signs of cooling, the monthly changes in service prices have been strong.

Goldman has updated its core and headline inflation forecast, which completely missed the bounce in headline prices this month, and it now expects both to peak in March at 2.7%yoy and 5.6%yoy respectively. It then expects Eurozone core inflation to fall to 1.7%yoy and look for headline inflation of 2.9%yoy in December.

Watch to see whether Lagarde says that a rate hike is unlikely in 2022, or that there will be a tweak in the ECB’s assessment over the transient nature of the current inflation spike.

Given that the ECB has underestimated inflation, it will be interesting to hear Lagarde speak on its view of inflation returning to below target next year. The most likely outcome is that the ECB will retain its baseline view, as it wants to see more data on wage developments, but it cannot deny the upside risks.

Key issues will be setting independent monetary policy in the region at a time when banks are entering a tightening cycle, and the tension between Russia and Ukraine.

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