“The inflation data for this Tuesday will cause sweat on the hands (of the members of the ECB), despite the fact that there is no great evidence about structurally higher prices,” says Bert Colijn, economist at ING in Amsterdam. The pressure is mounting on the European Central Bank and it may generate some headaches, but for now it does not seem enough for the central bank to change its roadmap.
This Tuesday there was a new surprise to the rise of inflation in the euro zone. The consumer price index (CPI) has stood at 3% per year compared to the forecasts that predicted a variation rate of 2.7% and the 2% that the ECB has as its objective.
With this data, the CPI reaches highs not seen since November 2011 , almost ten years ago, just as the elections are approaching in Germany, one of the countries that is worst tolerant of upward price deviations. In addition, the underlying or core inflation (it does not weigh fresh food or energy) has gone from 0.9% in July to the current 1.6% (month of August).
All the major components have done their bit, but once again it has been energy that has made the greatest contribution to price growth. According to Eurostat breakdown, energy showed the highest annual rate in August (15.4%, compared to 14.3% in July), followed by non-energy industrial goods (2.7%, compared to 0.7% July), food, alcohol and tobacco (2.0%, compared to 1.6% in July) and services (1.1%, compared to 0.9% in July).
A headache at the ECB
From the Reuters agency they assure that this inflation boom is “a big headache for the ECB”, because everything indicates that prices have not yet reached a ceiling in the euro zone and will continue to rise in the remainder of the year.
While the ‘doves’ of the ECB continue to argue that this rise in the CPI is temporary, each upward surprise in inflation gives wings to the ‘hawks’ of the central bank, who defend a more restrictive monetary policy to try to contain prices.
Although price growth is well above the 2% level that the ECB aims to achieve in the medium term, officials led by President Christine Lagarde insist that the CPI will slow again next year. The governor of the Bank of France, Francois Villeroy de Galhau, assured on Monday that he does not see any risk of overheating in the monetary bloc.
The temporary VAT cut in Germany in the second half of last year is raising inflation readings these months, while the country’s central bank expects rates of up to 5% by the end of 2021. This month’s rate is also seen bolstered by good summer sales, which were delayed last year due to pandemic-related restrictions.
What will happen to inflation?
Against this backdrop, the view of the ECB’s Governing Council on inflation remains optimistic. While prices are accelerating, the outlook has darkened slightly in recent weeks, with coronavirus infections on the rise again and the vaccination rate declining, fueling the threat of further restrictions.
According to ING’s Colijn, higher-than-expected inflation remains a risk with questions about whether higher costs for raw materials and transportation will be passed on to goods, and whether the reopening of the service sector will cause price jumps.
“There is some evidence that this effect will start to become more prominent towards the end of the year,” he says. “So stick with it: inflation has the potential to go higher from here.”