Surging fuel and food prices send eurozone inflation to new high of 7.5%

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Consumer prices in the eurozone rose by a record 7.5 per cent in March from a year ago, piling pressure on the European Central Bank to tighten its ultra-loose monetary policy faster than planned.

The biggest factors driving up eurozone inflation were higher energy and food prices, which have surged since Russia’s invasion of Ukraine hit supplies of oil, gas and other commodities.

The flash estimate for the increase in the harmonised index of consumer prices in March compared with the earlier record of 5.9 per cent set in February and was well above the 6.6 per cent average forecasts of economists polled by Reuters.

The rise in eurozone consumer prices by well above the ECB’s 2 per cent target has prompted some of its policymakers to call for it to cool demand by bringing forward the plan to end its net asset purchases and to raise interest rates for the first time in more than a decade.

Line chart of Harmonised index of consumer prices (annual % change) showing Inflation hits new high in eurozone

Investors are pricing in 0.63 percentage points of rate rises by the ECB before the end of this year, which would take its main deposit rate back into positive territory for the first time since 2014, up from its current all-time low of minus 0.5 per cent.

Several ECB policymakers have said they expect it to raise rates this year and some, such as Klaas Knot of the Netherlands, have said it could do so twice this year.

“We think that the ECB will soon conclude that it can’t wait any longer before starting to raise interest rates,” said Jack Allen-Reynolds, senior economist at Capital Economics, predicting the ECB would raise rates three times this year by a total of 0.75 percentage points.

But the central bank has so far only announced plans to stop net bond purchases by September, when it will decide if inflation will stay strong enough to justify a rate rise.

Some of its policymakers worry the war in Ukraine could plunge Europe into recession this year, while the sharp increase in the cost of living could undermine any rebound in consumer demand generated by the lifting of coronavirus restrictions.

“In current conditions, it is especially important to remain data-dependent and for optionality to be two-sided,” said ECB chief economist Philip Lane in a speech on Thursday.

Lane signalled the unwinding of its ultra-loose policy could be accelerated if needed, to counter “de-anchored inflation expectations, an intensification in catch-up wage dynamics or a persistent deterioration in supply capacity”. 

But he added that the “normalisation” of monetary policy could be slowed down if “the energy price shock and the Russia-Ukraine war were to result in a significant deterioration in macroeconomic prospects”.

In March, energy prices across the euro area rose by an all-time high of 44.7 per cent from a year earlier, while unprocessed food prices advanced 7.8 per cent, Eurostat said on Friday. Industrial goods prices were 3.4 per cent higher and services prices climbed 2.7 per cent.

Even excluding the more volatile energy, food, alcohol and tobacco prices, core inflation increased from 2.7 per cent in February to 3 per cent in March — underlining how price pressures are becoming more broad-based.

The highest national annual inflation rate in the eurozone was in Lithuania at 15.6 per cent, while Malta had the lowest at 4.6 per cent.

The surge in inflationary pressures was underlined by the 2.5 per cent rise in eurozone consumer prices between February and March, a record month-on-month increase.

Inflation is expected to continue rising as the Ukraine war adds to turmoil in energy markets and combines with China’s zero-Covid lockdowns of key industrial areas to intensify the supply chain problems that are leaving companies short of materials.

Manufacturers in the eurozone reported the biggest price increases for products leaving their factories since such data started to be collected in the 1990s, according to the latest purchasing managers’ survey published by S&P Global on Friday.

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