Rebound in euro area activity drives prices to fresh records

Bloomberg

Prices charged for goods and services in the euro area jumped by a record amount in February as an easing of pandemic restrictions led to an unexpectedly strong rebound in economic activity.
Both manufacturers and service providers saw output improve, according to purchasing managers indexes compiled by IHS Markit. Rising demand and a gradual easing of supply bottlenecks underpinned the stronger orders and job growth.
Pent-up spending and higher energy costs, however, stoked inflation.
“Persistent cost pressures caused by rising wages and energy bills led to the sharpest rise in average prices charged for goods and services in the PMI survey’s history,” IHS Markit said in a report on Monday.
While the region has recently witnessed some of the worst Covid-19 infection rates since the pandemic began, the latest easing of restrictions is renewing consumer demand, in particular for services like travel, tourism and recreation, according to IHS Markit.
The news of further price gains is likely to be viewed with concern at the European Central Bank, which faces a decision in March on whether it needs to withdraw stimulus more quickly and prepare for a possible interest-rate hike.
President Christine Lagarde refused to rule out an increase this year when asked earlier this month, having earlier said repeatedly that such a move was unlikely.
“The strength of the rebound in business activity signaled by the PMI provides welcome evidence that the economy has so far shown encouraging resilience in the face of the omicron wave,” Chris Williamson, chief business economist at IHS Markit, said in a statement. “But the intensification of inflationary pressures will add to speculation of an increasing hawkish stance at the ECB.”
Supply disruptions took a chunk out of euro-area economic growth last year and may persist into 2023 because of the pandemic, presenting a test for the European Central Bank, the International Monetary Fund (IMF) warned.
“The prospect of prolonged supply bottlenecks raises challenges for monetary-policy makers,” the Washington-based lender said in a report. “Keeping medium-term inflation expectations stable despite transient boosts to inflation, including from supply disruptions and surging energy prices, is key.”
In a blog post summarising the study’s findings, IMF managing director Kristalina Georgieva and the authors, Oya Celasun and Alfred Kammer, said the supply shocks are mostly transitory for now, and wages are likely to rise only moderately.