Euro zone inflation reached a new record high in June just ahead of the European Central Bank’s first rate increase in 11 years.
Headline inflation came in at 8.6% (year-on-year) for last month, according to preliminary figures from Europe’s statistics office Eurostat released Friday. That beat a prediction of 8.4% in a Reuters poll of economists. The rate had reached 8.1% in May which means the cost of living is continuing to surge across the euro zone nations.
According to ING analysts, “with a high risk of the euro zone economy falling into technical recession towards the end of the year and inflation coming down in 2023, there will be hardly any room for the ECB to deliver additional hikes in 2023.”
The Euro was last up 0.33% at $1.0473, reversing a decline sparked by increasing recession jitters in the euro zone and the energy crisis stoked by the war in Ukraine.
The European Central Bank is expected to raise interest rates in July for the first time in a decade to try to cool accelerating inflation, although economists are divided on the magnitude of any hike.
Markets will now look to euro zone inflation figures due on Friday to get a better sense of how aggressive the ECB might be in hiking rates.
Inflation has risen steadily for more than a year now, initially fuelled by post-pandemic supply shocks and now by energy prices on the fallout of Russia’s war on Ukraine.
At more than four times the ECB’s 2% target, inflation is so high it is at risk of getting stuck at uncomfortable levels as businesses and workers adjust their pricing and wage behaviours to the new reality.
Indeed, even if volatile food and fuel prices are filtered out, “core” inflation remained well above the ECB’s target, distressing reading for policymakers as it suggests perpetuating price growth via so-called second round effects.
Inflation excluding food and fuel prices accelerated to 4.6% from 4.4%, although an even narrower measure, which also excludes alcohol and tobacco, slowed to 3.7% from 3.8%.
Fuel prices rose by 41.9% in June while food costs increased by 11.1%, a particular concern for governments because lower income families spend a disproportionate portion of their cash on these items.
June inflation would have been even higher, analysts say, if Germany did not introduce temporary relief measures on fuel and transport, supporting arguments that further price pressure are still in the pipeline.
The European Central Bank is expected to raise interest rates in July for the first time in a decade to try to cool accelerating inflation, although economists are divided on the magnitude of any hike.
Markets will now look to euro zone inflation figures due on Friday to get a better sense of how aggressive the ECB might be in hiking rates.
“If you do get a firm (consumer price index) print in tomorrow, there is a chance that the market might price in increased odds of a 50-basis point hike in the July meeting, and that could be enough for the euro to bounce somewhat,” said Bipan Rai, North America head of FX strategy at CIBC Capital Markets.
Fresh euro zone data showed French inflation climbed to a record high of 6.5% in June, while Greece cut its growth forecast to 3.2% this year from 3.8%.
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