Euro-area inflation hits record as ECB mulls how quickly to hike

Consumer prices jumped 8.1% from a year earlier in May, exceeding the 7.8% median estimate in a Bloomberg survey.

Euro-zone inflation accelerated to an all-time high, intensifying the debate at the European Central Bank about how rapidly to raise interest rates from record lows.

Consumer prices jumped 8.1% from a year earlier in May, exceeding the 7.8% median estimate in a Bloomberg survey. The acceleration was driven by food and energy after Russia’s invasion of Ukraine sent commodity prices soaring. A gauge that excludes volatile items like those rose 3.8%.

With rate hikes in full swing in the US and the UK, the ECB is preparing to lift borrowing costs for the first time in more than a decade to combat the 19-member currency bloc’s unprecedented price spike.

President Christine Lagarde indicated last week that quarter-point increases are likely at meetings in July and September. Chief economist Philip Lane backed that timeline on Monday, calling moves of that size a “benchmark pace” in exiting stimulus, which also includes large-scale bond-buying.

Some officials have floated the idea of hiking by a half-point for the first time in the ECB’s history -- mirroring the latest Federal Reserve decision. Dutch Governing Council member Klaas Knot has said inflation numbers for May and June will determine whether such a step is warranted.

Inflation watch

Italy’s Ignazio Visco pushed back on Tuesday against the prospect of a more aggressive rate move, saying the ECB must proceed in an “orderly” manner to avoid potential bond-market turbulence. His French colleague, Francois Villeroy de Galhau, said the latest inflation data warrant a “gradual but resolute” normalization of monetary policy.

German bonds dropped, led by the long-end of the curve, with benchmark 10-year yields rising two basis points to 1.07%, while the euro continued to hold declines against the dollar, falling 0.5% to 1.0727. Money markets maintained ECB rate-hike wagers steady, pricing 115 basis points of tightening by December.

While price growth should peak this quarter, it will still average more than the ECB’s 2% target next year, according to European Union forecasts. A European Commission survey this week showed inflation concerns among consumers retreating, though remaining double the average level since 2000.

Driving Inflation  

Euro-area consumer prices rose more than anticipated this month Russia’s attack on its neighbour -- and the response it’s prompted -- remains the biggest risk to the euro-area economy.

Manufacturing has slowed amid soaring input prices and renewed supply-chain snarls. An EU ban on Russian oil, meanwhile, risks further stoking pressure on prices, which are rising partly as the war disrupts wheat and fertilizer supplies.

European governments have implemented an array of measures to ease the burden on households. Even so, prices rose by records this month in France, Italy and Spain.

After German inflation reached 8.7%, Finance Minister Christian Lindner on Monday called the fight against it the “top priority,” while advocating an end to expansive fiscal policy.

Bloomberg