Eurozone inflation tops ECB target for first time since 2018

Eurozone inflation tops ECB target for first time since 2018

Rate hits 2% in May, complicating policymakers’ decision on stimulus efforts

Eurozone inflation rose to 2 per cent in May, the first time the rate has surpassed the European Central Bank’s target in more than two years, complicating policymakers’ decision next week on whether to maintain its ultra-loose monetary policy.

The jump from 1.6 per cent in April followed an even sharper acceleration of consumer price growth in the US, which recently hit 4.2 per cent. The eurozone’s increase is likely to fuel investors’ anxiety that central banks will bring forward the winding down of the vast monetary stimulus they launched last year in response to the coronavirus pandemic.

The ECB’s governing council will meet next week to decide whether to adjust its monetary policy — including its recently accelerated pace of bond-buying — in response to signs that economic activity and prices are rising as Covid-19 lockdown measures are eased.

Eurozone inflation has rebounded after several months below zero last year, prompting most economists to forecast it will this year exceed the ECB’s target of close to, but below, 2 per cent.

However several ECB policymakers, including its president Christine Lagarde, have said the recent surge in inflation is only a temporary phenomenon, driven by one-off effects, and predict it will fade next year. They argue that this means the central bank’s policy should remain highly accommodative.

A 13.1 per cent year-on-year rise in eurozone energy prices was the main factor driving the harmonised index of consumer prices in the 19-country single currency area slightly above expectations to its highest level since October 2018, according to Eurostat.

Core inflation, excluding the more volatile prices of energy, food, alcohol and tobacco, rose more modestly than the headline figure, increasing from 0.7 per cent in April to 0.9 per cent in May. Prices in the bloc’s services sector, which have been weighed down by coronavirus-induced lockdowns, rose 1.1 per cent.

Most economists think a sustained period of above-target inflation is unlikely in the eurozone while there remain millions of people who lost their jobs, were put on furlough or left the workforce during the pandemic.

The ECB estimated that wage growth in the eurozone weakened further in the first quarter to 1.4 per cent.

Christoph Weil, an economist at Commerzbank, said: “The recession in the euro area triggered by the corona pandemic will continue to dampen wage growth in 2021.”

Eurostat said on Tuesday that unemployment in the bloc dipped to 8 per cent in April, its lowest level for nine months. The number of unemployed people dropped to 15.4m, down 134,000 from March, but that was still almost 1.3m higher than in April 2020.

Andrew Kenningham, an economist at Capital Economics, said that even though hiring is expected to “increase substantially” as lockdowns are lifted “firms will be able to draw on furloughed workers, so we don’t expect the unemployment rate to come down rapidly this year”.

In a sign that supply-side inflationary pressures are building, a closely watched business survey published on Tuesday said eurozone manufacturers faced unprecedented product shortages and price rises, constraining their ability to meet rising global demand.

IHS Markit’s eurozone purchasing managers’ index for manufacturing found “average input costs again rose substantially . . . hitting an unprecedented level in line with widespread product shortages”. It said factories “took advantage of improved pricing power by raising their own charges at the fastest rate in more than 18 years of data availability”.

Separately, 44 per cent of German construction companies are having problems sourcing materials in time, according to a survey by the Ifo Institute in Munich. “Lumber prices have virtually exploded in recent months, and sawmills can’t keep up,” said Felix Leiss at Ifo.

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