Eurozone inflation jumps to decade high of 3% in latest test for ECB

Eurozone inflation jumped to the highest in a decade in August, testing policymakers’ insistence that a post-crisis spike in cost pressures should prove temporary.

Consumer prices rose 3%, exceeding the predictions of all 37 economists in a Bloomberg survey. 

A measure of core inflation that strips out volatile items such as energy and food reached 1.6%, the highest since 2012.

The data will heighten the ECB’s communication challenge as a global supply squeeze and one-time factors drive up costs, while the pandemic threat persists. 

Viewing faster inflation as temporary, officials are keeping monetary policy looser than counterparts such as the US Federal Reserve, which expects to wind down stimulus soon.

‘Sweaty palms’

“[This] will cause some sweaty palms but has not given much evidence of more structural high inflation,” said Bert Colijn, an economist at ING Bank in Amsterdam. 

“This is not set to sway the ECB towards a more hawkish stance ahead of the September meeting.” 

Eurozone price growth may still keep accelerating for now. Imported inflation in Germany, the region’s largest economy, is running at 15%. 

Retailers across the 19-nation region plan to jack up prices in the next three months and consumers have already adjusted, saying they’re less likely to make major purchases in the coming year.

A separate report showed France’s inflation rate jumped in August by the most in almost two decades to 2.4%, the highest since 2018. 

In Italy, meanwhile, the pace of price growth reached 2.6%, the fastest since 2012.

German bonds extended losses after the eurozone data, with the yield on 10-year notes up two basis points at -0.42%.

Despite price growth running well above the 2% level the ECB aims to achieve in the medium term, officials led by president Christine Lagarde insist it will slow again next year. 

Germany’s annual consumer price inflation rose to a new 13-year high in August, according to preliminary data from the Federal Statistics Office, indicating increasing price pressures. Consumer prices, harmonised to make them comparable with inflation data from other European Union (EU) countries (HICP), rose by 3.4 per cent compared with 3.1 per cent in July.

The national inflation rate (CPI) even soared to 3.9 per cent in August, hitting its highest since December 1993 when the economy boomed following German reunification, a global newswire reported.

Europe’s largest economy is trying its best to recover from the pandemic as companies struggle with supply shortages.

Germany’s preliminary consumer price figures do not include values for core inflation.

German central bank chief Jens Weidmann has expressed concern over the prospect of the European Central Bank’s low-interest-rate environment being extended for too long.

Data released earlier showed German inflation outpaced wage growth in the second quarter as rising price pressures caused by the economic recovery and supply bottlenecks in manufacturing reduced the spending power of consumers.

The latest data suggests wages will not keep up with inflation also for the rest of the year.

In Spain, EU-harmonised consumer prices rose by 3.3 per cent year-on-year in August from 2.9 per cent in July, separate data from the National Statistics Institute (INE) showed.

The German and Spanish figures indicate that euro zone inflation has strengthened further in August.

No risk of overheating

Bank of France governor Francois Villeroy de Galhau said, on Monday, he sees no risk of overheating in the currency bloc.

A temporary cut to Germany’s sales tax in the second half of last year is lifting inflation readings at the moment, with the country’s central bank expecting rates as high as 5% toward the end of 2021. 

This month’s rate is also bolstered by the timing of summer sales, which were delayed last year due to pandemic curbs.

With that backdrop, the ECB governing council’s view of inflation remains sanguine. 

While prices are accelerating, the outlook has become cloudier in recent weeks, with coronavirus infections on the rise again and the vaccination rate slowing down, increasing the threat of new restrictions.

According to Mr Colijn at ING, faster inflation remains a risk, with question marks over whether higher raw-material and transport costs will pass through to goods, and if service-sector reopenings will cause price jumps.

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