Eurozone inflation fell less than expected last month and core price gains accelerated, according to Eurostat statistics released on Thursday, supporting the European Central Bank’s (ECB) argument to continue rapidly raising prices. interest rates. Due to lower energy prices, consumer price inflation in the 20 nations that use the euro eased to 8.5% in February from 8.6% the previous month, but still exceeded forecasts by 8.2% economists.
There are concerns that the earlier rise in oil prices has trickled into the economy through so-called second-round effects, making price growth much harder to stop, despite the fact that the Headline inflation is still considerably below its double-digit highs in October. Indeed, core inflation, which excludes volatile food and fuel costs and is a key ECB measure, rose to 5.6% from 5.3%, above expectations for a stable reading.
The ECB has pledged to raise interest rates another half percentage point on March 16 to combat inflation. However, the gloomy data is already leading the discussion to later meetings, as investors speculate on how much the ECB will need to raise rates.
Investors now anticipate the ECB’s 2.5% deposit rate to rise by a total of 100 basis points in March and May before falling to around 4.1% by the end of the year, as markets have already priced in. An additional 50 basis points of increases in the most recent month.
Despite consistent and clear guidance from the European Central Bank and recently reiterated by ECB President Christine Lagarde, market activity has increased to such an extent that some are predicting the possibility of rates rising by more than 50 basis points. this month.
The problem is that core inflation is an early sign of how long price rises will last, and its persistent rise indicates that it could take some time to bring headline inflation down to the ECB’s 2% target. As the services sector is particularly sensitive to wage growth and the increase indicates an increase in labor costs, price growth in the sector, which makes up the bulk of core inflation, accelerated from 4. 4% to 4.8%.
Although unprocessed food price growth shot up from 11.3% to 13.6%, industrial goods inflation rose from 6.7% to 6.8%. Joachim Nagel, the president of the Bundesbank, has already claimed that the recent fall in energy prices simply reduces inflation in the short term and does not improve the outlook in the medium term, requiring another significant rate hike by the ECB. in May.
Many well-known conservatives, notably Dutch central bank president Klaas Knot and ECB board member Isabel Schnabel, have expressed concerns similar to his, indicating that the hardline majority in the ECB to change course in the short term.
However, Lagarde maintained that when the rise in gasoline prices at the start of Russia’s war in Ukraine is removed from the base figures, disinflation will accelerate from next month. Markets remain bearish and on Thursday, a longer-term index of market-based inflation predictions rose more than 25 basis points in just six weeks to 2.5%.
