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

Bloomberg

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 rise 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.
While a global supply squeeze is driving up costs, the price surge in the region is also fuelled by one-time factors such as lower year-earlier comparisons. Viewing the jump as temporary, the European Central Bank is keeping monetary policy emphatically looser than counterparts such as the Federal Reserve, which expects to wind down stimulus soon.
Still, euro-zone price growth may 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.
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 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% towards 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.
The data will present the ECB’s Governing Council with a communication challenge when it meets next week and releases new economic forecasts. 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 risk of new restrictions.
Despite those threats, officials may need to revise their inflation outlook for this year, RBC Capital Markets said on Tuesday before the data were released.
“Overall, the near-term outlook for inflation looks firmer than anticipated by the ECB,” economists including Cathal Kennedy wrote in a report. “The ECB’s next round of staff forecasts, published at its Sept. 9 meeting, are likely to see upgrades to its near-term projections.”