Eurozone inflation hits record 8.6% in June

Eurozone price growth hit a record 8.6% year-to-date through June, raising tensions between rate-setters at the European Central Bank over the speed of a planned interest rate hike.

eurozone inflation rose from 8.1% in May after a sharp rise in energy and food prices in many countries due to supply disruptions caused by Russia’s invasion of Ukraine. Rising price pressures in the bloc will more than offset a slowdown in German inflation driven by transport and electricity subsidies to mitigate a higher cost of living.

Economists polled by Reuters had expected inflation in the eurozone at 8.4%. Klaus Wiestesen, an economist at Pantheon Macroeconomics, said the larger-than-expected rise “increases the risk” that the ECB will raise rates by more than a planned quarter of a percentage point at its meeting in three weeks, adding that the central bank was “miles behind” from the bend.”

ECB President Christine Lagarde said at the bank’s annual forum in Sintra, Portugal this week that stick to your plan start raising interest rates by 25 basis points on July 21st. inflation.

The central bank is juggling a difficult balance between reversing nearly a decade of super-free money supply to curb runaway price increases and trying to avoid dragging the region into a deep recession or another debt crisis after the cost of credit has risen sharply in weaker countries like Italy.

Fabio Panetta, the most dovish member of the ECB’s executive board, said in speech Friday’s rate hike should be “gradual” because, unlike in the US, high inflation “does not reflect excess demand in the euro area.”

“Consumption and investment remain below their pre-pandemic levels and further away from their pre-pandemic trends,” Panetta said. Once the ECB’s deposit rate rises from minus 0.5% to zero, any further moves “will depend on the evolution of the outlook for inflation and the economy,” he added.

However, some hawkish interest rates on the ECB’s Governing Council, including several in the Baltics, where inflation is the highest, plan to push for a bigger 50 basis point rate hike in July on concerns that price pressures are barely easing. .

Panetta also defended the ECB’s plan to curb unwarranted
discrepancies in the cost of government borrowing in the euro area through the purchase of bonds of the most vulnerable countries with Anti-fragmentation
tool”
. He said it would be in the interests of the stronger
countries too, because without it they “would experience capital
inflows that will reduce returns, leading to funding conditions
it would be too free and inflation would be too high.”

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Unemployment in the 19 euro-operating countries fell to a record low of 6.6% in May, which is likely to increase upward pressure on wages.

Christoph Weil, an economist at Commerzbank, predicts eurozone inflation to hit 7.5% by the end of this year, well above the ECB’s 2% target. “Unions will demand at least partial compensation for higher inflation in the upcoming wage talks,” he said.

Inflation rose in 17 of the 19 eurozone countries in June, slowing only in Germany and the Netherlands, according to a quick estimate by Eurostat on Friday. It grew at double-digit rates in nine Member States and exceeded 20% in Estonia and Lithuania. The lowest inflation rates were in Malta and France – 6.1 and 6.5 percent respectively.

Energy prices rose to a record high for the eurozone by almost 42% in June after Russia cut natural gas supplies to Europe. Food, alcohol and tobacco prices rose 8.9% in the bloc, reflecting the disruption to agricultural supplies caused by the conflict in Ukraine.

“Even if demand falls more sharply over the next few months, we believe that not all input costs have gone through the system yet,” said Markus Wieden, an economist at SEB.

Core inflation, excluding more volatile energy and food prices, slowed slightly to 3.7% in June, reflecting cheaper public transport due to government subsidies. These measures included a temporary €9 monthly train ticket in Germany, which helped slow down the inflation rate in the country to 8.2 percent.