Euro zone inflation hit a record high again in May, calling into question the European Central Bank’s view that gradual interest rate hikes from July will be enough to curb persistent growth. Of the prices.
Inflation in the 19 countries sharing the euro accelerated to 8.1% in May from 7.4% in April, beating expectations of 7.7%, as price growth continued to rise, indicating that it is no longer just energy that drives the headline figure.
Prices have risen sharply across Europe over the past year, initially because of supply chain problems following the pandemic, and then because of Russia’s war in Ukraine, suggesting a new era of rapid price growth is on the horizon. sweeping away a decade of ultra-low inflation.
Although headline inflation is now 4 times higher than the ECB’s target of 2%, the ECB’s monetary policymakers may be more concerned about the rapid rise in core prices, indicating that what was previously seen as a transitory jump in prices it’s taking hold.
Inflation excluding food and energy prices, which the ECB closely monitors, accelerated from 3.9% to 4.4% year-on-year, while an even tighter measure, which also excludes alcohol and tobacco, accelerated from 3.5% in April to 3.8% year-on-year.
Hoping to control inflation, ECB President Christine Lagarde and her Chief Economist Philip Lane have already announced 25 basis point increases in the ECB deposit rate (currently at -0.5%) in July. and September.
However, some currency leaders and economists doubt that this is enough, especially as core inflation shows no signs of abating.
The problem is that once high energy prices seep into the economy, inflation spreads and takes hold, eventually perpetuating itself through a price-wage spiral.
Although the evidence for this trend is not yet clear, a range of data ranging from increases in negotiated wages to increases in core inflation show a growing risk.
For this reason, the central bank governors of Austria, the Netherlands and Latvia have stated that a rate hike of 50 basis points in July should be on the table.
Klaas Knot, the head of the Dutch central bank, went so far as to say that inflation expectations are now at the upper end of what could still be classified as anchored, indicating that households and investors may soon begin to doubt the determination of the ECB to curb price growth.
The ECB will meet again on June 9, where it will formally end the bond-buying program at the end of June and continue signaling rate hikes.