Eurozone price growth hit a record high of 8.6% in the year to June, heightening tensions between rate setters at the European Central Bank over the speed of expected increases in interest rates.
Eurozone inflation rose 8.1 percent in May, after a sharp acceleration in energy and food prices in many countries due to supply disruptions caused by Russia’s invasion of Ukraine. Rising price pressures in the bloc more than offset a slowdown in German inflation driven by transport and electricity subsidies to cushion the rising cost of living.
Economists polled by Reuters had expected inflation of 8.4% in the eurozone. Claus Vistesen, an economist at Pantheon Macroeconomics, said the larger-than-expected rise “raises the risk” that the ECB will raise rates by more than its planned quarter of a percentage point at its meeting in three weeks, adding that the bank central was “miles away”. behind the curve.
ECB President Christine Lagarde said this week at the bank’s annual forum in Sintra, Portugal, that she would stick to her plan to start raising interest rates with an increase of 25 basis points on July 21. She said a bigger move was likely in September unless inflation slowed quickly.
However, some hawkish rate regulators in the ECB’s governing council plan to push for a bigger 50 basis point rate hike in July amid concerns that price pressures show little sign of easing.
Sweden’s Riksbank this week accelerated the pace of its rate hikes to 50 bps in response to soaring inflation, mirroring similar moves by central banks in Switzerland and Norway. Last month, the US Federal Reserve raised interest rates by 75 basis points.
Unemployment in the 19 countries that share the euro fell to a new high of 6.6 percent in May, which is likely to add upward pressure on wages. The ECB has forecast wage growth in the bloc to double to 4% this year.
Christoph Weil, an economist at Commerzbank, predicted that inflation in the eurozone would be 7.5% by the end of this year, well above the ECB’s 2% target. “The unions will demand at least partial compensation for higher inflation in the next wage negotiations,” he said. “Wage inflation is therefore likely to increase significantly.”
The ECB is juggling a difficult balance between reversing nearly a decade of ultra-free money to rein in runaway price growth while trying to avoid dragging the region into a deep recession or another debt crisis after that borrowing costs have risen sharply in weaker countries like Italy.
Inflation rose in 17 of 19 eurozone countries in June, slowing only in Germany and the Netherlands, according to a Eurostat flash estimate on Friday. It increased at double-digit rates in nine Member States and was above 20% in Estonia and Lithuania. The lowest inflation rates were observed in Malta and France, at 6.1 and 6.5% respectively.
Energy prices hit a eurozone record high of nearly 42% in June after Russia cut natural gas supplies to Europe. Food, alcohol and tobacco prices in the bloc rose 8.9%, reflecting the disruption in the supply of agricultural products caused by the conflict in Ukraine.
“Even if demand drops more drastically over the next few months, we believe not all input costs have gone through the system yet,” said Marcus Widén, economist at SEB. “This certainly applies to food and energy, but also to basic goods and services.”
Core inflation, excluding more volatile energy and food prices, eased slightly to 3.7% in June, reflecting cheaper public transport thanks to government subsidies. These measures included Germany’s temporary €9 monthly train ticket, which helped slow the country’s inflation rate to 8.2%.
Eurozone services price growth slowed to 3.4%, while non-energy industrial goods prices continued to accelerate to 4.3%.