Euro-area inflation jumps to decade-high 3% in challenge for ECB

Euro-area inflation jumped to the highest in a decade in August, testing policy makers’ insistence that a post-crisis spike in cost pressures should prove temporary. 
 

Consumer prices rose 3%, exceeding the predictions of all 37 economists in a Bloomberg survey. A measure of core inflation that strips out volatile items such as energy and food reached 1.6%, the highest since 2012.  

The data will heighten the European Central Bank’s communication challenge as a global supply squeeze and one-time factors drive up costs, while the pandemic threat persists. Viewing faster inflation as temporary, officials are keeping monetary policy looser than counterparts such as the Federal Reserve, which expects to wind down stimulus soon. 

“Today’s release will cause some sweaty palms but has not given much evidence of more structural high inflation,” said Bert Colijn, an economist at ING Bank NV in Amsterdam. “This is not set to sway the ECB towards a more hawkish stance ahead of the September meeting.”

Euro-zone price growth may still keep accelerating for now. Imported inflation in Germany, the region’s largest economy, is running at 15%. Retailers across the 19-nation region plan to jack up prices in the next three months and consumers have already adjusted, saying they’re less likely to make major purchases in the coming year. 

A separate report on Tuesday showed France’s inflation rate jumped in August by the most in almost two decades to 2.4%, the highest since 2018. In Italy meanwhile, the pace of price growth reached 2.6%, the fastest since 2012 and a half point above the median forecast of economists. 

German bonds extended losses after the euro-zone data, with the yield on 10-year notes up two basis points at -0.42%.

Despite price growth running well above the 2% level the ECB aims to achieve in the medium term, officials led by President Christine Lagarde insist that it will slow again next year. Bank of France Governor Francois Villeroy de Galhau said Monday he sees no risk of overheating in the currency bloc. 

A temporary cut to Germany’s sales tax in the second half of last year is lifting inflation readings at the moment, with the country’s central bank expecting rates as high as 5% toward the end of 2021. This month’s rate is also bolstered by the timing of summer sales, which were delayed last year due to pandemic curbs.

With that backdrop, the ECB Governing Council’s view of inflation remains sanguine. While prices are accelerating, the outlook has become cloudier in recent weeks, with coronavirus infections on the rise again and the vaccination rate slowing down, increasing the threat of new restrictions. 

According to Colijn at ING, faster inflation remains a risk, with question marks over whether higher raw-material and transport costs will pass through to goods, and if service-sector reopenings will cause price jumps. 

“There is some evidence that this effect will start to become more prominent towards the end of the year,” he said. “So hold tight: inflation has the potential to go higher from here.”