Euro area inflation hits record to test ECB resolve

Bloomberg

Inflation in the euro region accelerated beyond already record levels, defying expectations for a slowdown and complicating the task for European Central Bank officials who insist the current spike is temporary.
Consumer prices jumped 5% from a year earlier in December — faster than the previous month’s 4.9% gain and more than the 4.8% median estimate in a Bloomberg survey of economists. A measure that strips out volatile components such as food and energy came in at 2.6%, matching November’s reading.
Economic confidence in the euro area, meanwhile, slipped by more than analysts forecast amid the emergence of the coronavirus’s highly contagious Omicron variant.
The inflation data piles more pressure on the ECB after supply-chain disruptions and soaring energy costs drove price growth to its fastest since the common currency was created.

December Surprise
While the Frankfurt-based institution has mapped out a retreat from crisis-era stimulus measures, more aggressive monetary-policy tightening by other major central banks has prompted some officials to urge a tougher stance.
President Christine Lagarde said last month that inflation is likely to remain elevated in the near term before slowing in 2022 to settle below the 2% target. She’s said a rate hike wouldn’t be the correct response to the current bout of price growth, partly because its effects would only be felt later on, when pressures would already be easing.
A survey of businesses last month by IHS Markit supported that view, showing strains on supply chains and cost pressures easing, though shortages and transport problems still weighed on companies.
Natural gas prices remain a headache, rising again this week after Russia curbed deliveries to western Europe. That’s threatening to squeeze consumers and force companies in energy-reliant industries to curtail output. Omicron is also muddying the outlook, with analysts unclear on whether the disruption it causes will stoke inflation or have the opposite effect by curbing the economic recovery.
The sentiment report from the European Commission showed heightened fears of the pandemic hurting confidence among consumers and the retail and services sectors.
The uncertainty has led ECB officials to urge flexibility in their approach to inflation. Governing Council member Martins Kazaks said this week in an interview that policy makers will act if the outlook for prices picks up.