Eurozone price growth hit a record high of 8.6 percent in the year to June, fueling tensions among rate setters at the European Central Bank over the pace of proposed rate hikes.
Eurozone inflation rose from 8.1 percent in May after energy and food prices rose sharply in many countries due to supply disruptions caused by Russia’s invasion of Ukraine. Rising price pressures in the bloc more than offset a slowdown in German inflation caused by transport and electricity subsidies to cushion the higher cost of living.
Economists polled by Reuters had expected inflation in the euro zone to be 8.4 percent. Claus Vistesen, economist at Pantheon Macroeconomics, said the stronger-than-expected hike “raises the risk” that the ECB will hike rates by more than the planned quarter-point at its meeting in three weeks, adding that the central bank is “miles away.” after”. Curve”.
ECB President Christine Lagarde said at the bank’s annual forum in Sintra, Portugal this week that she would stick to her plan to hike interest rates by 25 basis points on July 21. She said a bigger move is likely in September. unless there is a rapid deceleration in inflation.
The central bank is juggling a difficult balancing act between reversing nearly a decade of ultra-loose funds to curb rampant price growth and trying not to drag the region into a deep recession or another debt crisis after borrowing costs in weaker countries such as Italy .
Fabio Panetta, the most dovish member of the ECB’s executive board, said in a speech on Friday that rate hikes should be “gradual” because, unlike in the US, high inflation “does not reflect excess demand in the euro area”.
“Consumption and investment remain below their pre-pandemic levels and even further from their pre-pandemic trend,” Panetta said. Once the ECB’s deposit rate moves back above zero from minus 0.5 percent, any further steps will “depend on the evolution of the inflation and economic outlook,” he added.
However, some tightening rate-setters on the Governing Council – including several in the Baltics, where inflation is highest – plan to push for a larger 50bp rate hike in July amid concerns that price pressures are unlikely to ease.
Sweden’s Riksbank accelerated the pace of its rate hikes to 50 basis points this week in response to rising inflation, mirroring similarly large moves by central banks in Switzerland and Norway. The US Federal Reserve raised interest rates by 75 basis points last month.
Unemployment in the 19 countries that share the euro fell to a record low of 6.6 percent in May, likely adding to upward pressure on wages.
Christoph Weil, an economist at Commerzbank, predicts that inflation in the euro zone will be 7.5 percent by the end of this year, well above the ECB’s 2 percent target. “The unions will demand at least partial compensation for the higher inflation in the forthcoming collective bargaining,” he said.
Inflation rose in 17 out of 19 euro-zone countries in June, slowing only in Germany and the Netherlands, according to a Eurostat flash estimate released on Friday. It increased by double digits in nine Member States and exceeded 20 percent in Estonia and Lithuania. The lowest inflation rates were recorded in Malta and France at 6.1 and 6.5 percent respectively.
Energy prices rose nearly 42 percent in June to an all-time high for the euro zone after Russia cut natural gas supplies to Europe. Food, alcohol and tobacco prices across the bloc rose 8.9 percent, reflecting the disruption in supplies of agricultural commodities caused by the Ukraine conflict.
“Even if demand falls more drastically in the coming months, we believe that not all input costs have gone through the system yet,” said Marcus Widén, economist at SEB.
Core inflation excluding the more volatile energy and food prices slowed slightly to 3.7 percent in June, on the back of cheaper public transport thanks to government subsidies. Among those measures was Germany’s temporary €9-month train ticket, which helped slow the country’s inflation rate to 8.2 percent.
