Sticky underlying inflation set to keep ECB in tension

FRANKFURT—Eurozone inflation eased for the third month in a row in January, but the European Central Bank’s Mitigation may be limited.

Inflation in the 20 euro-using countries fell to 8.5% last month from 9.2% in December, according to Eurostat data.

That figure is well below the 9% predicted by a Reuters poll of economists.

Price growth has slowed sharply since hitting a record high of 10.6% in October, but the ECB has already pledged further interest rate hikes, keeping inflation above its target of 2 if borrowing costs do not rise. We are concerned that it may become established in excess of 100%.

The ECB policymakers’ meeting on Thursday is all but certain to raise interest rates by half a percentage point to 2.5%, and the biggest question is how much that will signal tightening.

A fall in headline inflation is unlikely to erase concerns among conservative policymakers that rapid price increases are taking hold, a concern reinforced by Wednesday’s high underlying inflation.

Inflation, which excludes volatile food and fuel prices, rose to 7% from 6.9%, but a narrower gauge watched by the ECB remained stable at 5.2%, above the forecast of 5.1%. increase.

Underlying inflation was driven by higher prices for processed food and industrial goods, but service inflation, a key concern, eased slightly as it reflected wage growth.

“With the ECB’s attention increasingly shifting away from key indicators and toward core inflation, lower headline inflation will do little to deter central banks from being tougher,” said Matthäus Urban of Oxford Economics. I am thinking,” he said.

As such, we expect the ECB to raise interest rates by 50 basis points this month and next, with the risk of another 25 basis point hike in May if inflationary pressures do not ease as expected.”

Headquarters of the European Central Bank (ECB) in Frankfurt, Germany, March 12, 2016 (Kai Pfaffenbach/Reuters)

data suspicion

Another issue is data reliability. Unlike other months, data for Germany, the block’s largest economy, were missing, forcing Eurostat to use model-based estimates.

“Let’s not be fooled by figures missing a third of the information. For all practical purposes, the January inflation print is delayed,” Nordea said in a note.

Economists say January figures are prone to unusual volatility due to price swings at the beginning of the year.

Hawkish policymakers argue that a slower-than-expected recession means a smaller rise in unemployment, so wages will continue to come under upward pressure, forcing the ECB to raise rates further. highly sexual.

Separate data on Wednesday showed the euro zone’s unemployment rate stabilized at 6.6% in December, the lowest level ever.

ECB hawks also say there is a risk of core inflation well above the ECB’s 2% target, as the secondary impact of higher energy prices could permeate and lead to a spiral. There is a possibility.

The market now expects the ECB rate to peak at 3.5%, the highest in more than two decades, suggesting another 100 basis points hike after Thursday’s move.

But policy pigeons from the south of the bloc are likely to fight back, arguing that the economy has already started to respond and that past policy moves will need more time to take effect.

They point to figures that show bank lending plunged this week by the biggest drop since the European debt crisis in 2011, with negative growth expected last quarter in the euro zone’s main economies Germany and Italy. wax.

The unexpected positive growth in the Eurozone in the final months of 2022, albeit modest, was due to very mild winter weather that helped keep energy costs down for businesses and homes, and a strong Irish economy. It could very well depend on the data.

Market-based natural gas prices have fallen below levels before Russia invaded Ukraine about a year ago, and oil prices have also fallen from last summer’s highs, further easing price pressures. must.