Core inflation haunts ECB and European households

Eurozone core inflation re-accelerated in June, a setback for the European Central Bank that may reinforce its determination to raise interest rates in July

Fri, 30 Jun, 2023 - 17:01

Eurozone core inflation re-accelerated in June, a setback for the European Central Bank that may reinforce its determination to raise interest rates in July.

The measure of underlying consumer-price gains, which excludes items like fuel and food, came in at 5.4% — just below the median estimate in a Bloomberg survey of economists — as the cost of services picked up markedly.

The deterioration may eclipse an improvement in the headline inflation gauge. That moderated noticeably to 5.5% from 6.1%, reaching the lowest level since before the war in Ukraine broke out, after energy costs fell.

The data, released hours before numbers that may show the US Federal Reserve’s preferred price metrics stayed elevated in May, illustrates the continued slog for global central bankers.

ECB policymakers’ anti-inflation and rate-hiking campaign will soon mark its first anniversary.

Another rate increase in July is a “fait accompli,” according to ECB vice president Luis de Guindos, who says the prospect of a move at the subsequent meeting in September is an open question.

“Base effects and statistical distortions are likely to keep the core reading elevated over the next couple of months and see the ECB hiking at least until September," said Bloomberg Intelligence senior economist Maeva Cousin.

"But if some of the early signs of easing price gains in services are confirmed, they could give the doves on the Governing Council more ammunition to call for a pause after the July meeting,” Ms Cousin said.

ECB president Christine Lagarde said:

While we do not currently see a wage-price spiral or a de-anchoring of expectations, the longer inflation remains above target, the greater such risks become. We need to bring inflation back to our 2% medium-term target in a timely manner.

National numbers this week from across the 20-member eurozone showed Spanish inflation below the ECB’s 2% target, while France, Italy, and the Netherlands all saw a retreat, albeit well above the goal. Irish inflation fell to 4.8% in June from 5.4% in May.

But German consumer-price growth quickened to 6.8%, driven largely by an ultra cheap public-transport ticket the government offered last year to help citizens deal with surging energy costs.

Speaking at the European Union summit in Brussels, German chancellor Olaf Scholz said his government’s efforts to diversify energy supplies away from Russia have helped dampen inflation “even if prices are not yet where we want them to be”.

“It’s very important that we never lose sight of the goal of price stability, we owe that to citizens,” he said.

Such worries are increasingly troubling policymakers after a historic tightening campaign that has seen 400 basis points of hikes in borrowing costs.

Several officials speaking at the ECB’s annual retreat in Sintra, Portugal this week underscored their focus on underlying inflation, saying that a slowdown must materialise before they can pause rate increases.

Another hike beyond July would bring the ECB’s deposit rate to 4%. Officials have also said that once borrowing costs reach a peak, they will stay there for an extended period to get consumer price pressures under control.