Consumer prices in the eurozone rose by a record 5.1 per cent in January from a year earlier, keeping inflation higher than expected and increasing the pressure on the European Central Bank to respond with tighter monetary policy.
Steeper increases in the price of energy and food were only partly offset by slower growth in prices of manufactured goods, which meant annual inflation rose from its previous eurozone record of 5 per cent in December, Eurostat said on Wednesday.
That clashed with widespread expectations for eurozone inflation to fall at the start of this year. Economists polled by Reuters had on average forecast a eurozone inflation rate of 4.4 per cent in January.
Compared with the previous month, consumer prices rose 0.3 per cent, indicating that underlying inflationary pressures continue to build in the 19-country bloc. The highest national inflation rate was 12.2 per cent in Lithuania, while France had the lowest at 3.3 per cent.
Eurozone energy prices rose by a record 28.6 per cent from the previous year in January, while growth in unprocessed food prices accelerated to 5.2 per cent. Services prices continued to rise 2.4 per cent while growth in goods prices slowed to 2.3 per cent.
Core inflation, stripping out more volatile energy and food prices, was 2.3 per cent. That was down from 2.6 per cent in December but it had been expected to fall below 2 per cent.
The rising cost of living is likely to dominate the first ECB governing council meeting of the year on Thursday, even if most economists expect the bank to stick to its timetable for keeping interest rates unchanged while it steadily reduces asset purchases over the course of this year.
The euro climbed 0.4 per cent against the dollar to $1.131 on Wednesday while the price of German bonds fell as the 10-year yield reversed earlier losses to rise 2 basis points to 0.05 per cent, its highest for almost three years.
Higher than expected inflation has led the US Federal Reserve and the Bank of England to shift to a more “hawkish” policy stance than the ECB. The BoE is expected to raise rates for a second consecutive time on Thursday, while the market is pricing in five rate rises by the Fed this year.
The ECB has rebuffed investor bets that it will raise rates this year, saying it will not do so before it stops asset purchases, which it plans to continue at least until October.
Markets this week pulled forward expectations of a tightening in eurozone monetary policy, with a rise in the ECB’s deposit rate to minus 0.25 per cent — from its current rate of minus 0.5 per cent — now priced in by December, according to trading in short-term funding markets.
Bert Colijn, senior economist at ING, said he expected the ECB to “push back against early rate hikes” on Thursday. He said the fall in core eurozone inflation and the deceleration in goods prices showed “there is still no evidence of widespread second-round effects” whereby higher prices trigger sharp increases in wages.
Yet economists are expecting wage growth to pick up after the eurozone unemployment rate hit an all-time low of 7 per cent in December and a quarter of EU companies reported labour shortages — a new high.
The persistence of inflation above the ECB’s 2 per cent target has already caused widening divisions on its governing council. The “hawkish” heads of the German, Belgian and Austrian central banks complained at last month’s meeting that it was committing to continue bond purchases for too long.
“The patience of the hawks is likely to wear thin as underlying inflation pressures continue to build over coming months,” said Frederik Ducrozet, a strategist at Pictet Wealth Management, adding that inflation was on track to be 1 percentage point higher than ECB forecasts in the first quarter.
Ducrozet, however, added that ECB president Christine Lagarde was likely to continue “resisting panic” over high inflation and he forecast the bank would only start to raise its deposit rate in March 2023.
Source: Economy - ft.com
