Balazs Coranyi

FRANKFURT (Reuters – The inflation rate continued to climb across Europe’s major economies. Households are now suffering from rising energy costs and the shock of Russia’s invasion.

In March, prices rose to multi-decade heights in Italy and France as well as Germany, Germany, Spain, and Germany. This created a dilemma for the European Central Bank. It must not only combat the rising costs but also keep the economy from stalling.

Italy saw inflation of 7%, while France experienced a 5.1% increase in prices. This was due to soaring fuel prices and other factors that often affect poorer households.

Together with high readings from Spain and Germany a few days earlier, these data suggest that Friday’s euro zone reading will exceed expectations. It will also be significantly higher than the ECB’s 2% target.

Although energy prices are the major cause of this surge, Europe’s labour markets is at their tightest in many decades. It suggests that there is an underlying trend towards rising price pressures and that wage increases will be more frequent.

Separate data from Thursday showed that Eurozone unemployment was at an all-time low of 6.8% in February. The ECB projects a further decline.

ABN Amro’s analysts stated in a note that the increase in inflation was almost entirely driven by supply. Accordingly to them, weaker economic growth is likely.

The economists added that “Indeed, economic expansion is likely to disappoint ECB predictions.” The ECB is likely to balance these forces through a moderate tightening of policy.

RATE HIKES…OR NOT

Markets have priced in a total of 60 basis points this year for an increase in the ECB’s deposit rate. It is now minus 0.50%. This would be the end of a near decade-long period with negative rates.

Market analysts, however, are less cautious. Even the most conservative policymakers don’t want rates to jump into positive territory immediately. It indicates a disconnect in market pricing and the ECB’s signals.

Philip Lane, the Chief Economist of the ECB, was among those who voted against the rate-setting Governing Board. He even warned that war might force the ECB into a more relaxed policy.

Lane spoke out in support of tightening or easing monetary policy.

It is important to be cautious, as Germany, one of the most powerful economies in the Euro zone, has already begun planning for the rationing of natural gas in the unlikely event that Russian supplies are interrupted.

Some others said that high inflation can hurt consumers and slow growth. Therefore, the ECB is finding it increasingly hard to control it. Talk of rate hikes will only intensify.

Greg Fuzesi of JPMorgan (NYSE 🙂 stated that although high inflation may be a deterrent to growth, the ECB probably has some pain threshold for the inflation data.

“The more upside inflation surprises, the less chance there is that any improvement news from Ukraine will intensify an interest rate outlook debate.”