Inflation in the euro zone declined in February
According to statistics from Eurostat released on Thursday, the euro zone’s inflation dropped less than anticipated last month and underlying price rises accelerated, supporting the argument for the European Central Bank (ECB) to keep swiftly hiking interest rates. Due to lower energy prices, consumer price inflation in the 20 nations that use the euro currency decreased to 8.5% in February from 8.6% the previous month, but it still exceeded economists’ forecasts of 8.2%.
There are concerns that the previous increase in oil prices has seeped into the economy through so-called second-round effects, making price growth much harder to stop, despite the fact that overall inflation is still considerably below its double-digit highs in October. In fact, underlying inflation, which excludes volatile food and fuel costs and is a key ECB measure, increased from 5.3% to 5.6%, above forecasts for a stable reading.
The ECB has pledged to raise interest rates by another half a percentage point on March 16 in order to combat inflation. However, gloomy data are already pushing the discussion to later meetings as investors speculate about how far the ECB will need to boost rates.
Investors now anticipate that the ECB’s 2.5% deposit rate will increase by a total of 100 basis points in March and May before falling to about 4.1% at the end of the year as markets have already priced in an additional 50 basis points of increases in the most recent month.
Euro zone core prices rose
Despite the consistent and clear guidance given by the European Central Bank and reiterated recently by ECB President Christine Lagarde, market activity has increased to such an extent that some are predicting the possibility of rates increasing by over 50 basis points this month.
The issue is that underlying inflation is a leading sign of how long price rises will last, and its persistent rise indicates that it might take some time to bring headline inflation down to the ECB’s 2% target. Since the services sector is particularly sensitive to wage growth and the increase signals an increase in labor expenses, the price growth in the sector, which makes up the largest portion of core inflation, accelerated to 4.8% from 4.4%.
Although unprocessed food price growth soared to 13.6% from 11.3%, industrial goods inflation increased to 6.8% from 6.7%. Joachim Nagel, the president of the Bundesbank, has already claimed that the recent drop in energy prices simply reduces short-term inflation and does not enhance medium-term prospects, necessitating a further 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 voiced worries similar to his own, indicating that the ECB’s hawkish majority is unlikely to change course anytime soon.
Yet, Lagarde maintained that when rising gas prices at the start of Russia’s war in Ukraine be knocked out of base figures, disinflation will pick up speed starting from next month. Markets are still pessimistic, and on Thursday, a longer-term index of market-based inflation predictions increased by over 25 basis points in just six weeks to 2.5%.