Euro zone inflation hits new peak, deepening ECB’s dilemma

  • Inflation reaches 7.5%
  • The peak could be months away
  • Bundesbank demands tighter coverage
  • ECB should take its time, chief economist says
  • Progress close to stagnation in the first half of the year

FRANKFURT, April 1 (Reuters) – Eurozone inflation jumped to 7.5 percent in March, hitting another record high, with months still before its peak, putting the European central financial institution under strain to control runaway costs at the same time as progress slows sharply.

The progress in buyer value within the 19 countries sharing the euro accelerated from 5.9% in February, Eurostat said on Friday, well above the expected 6.6%, as the conflict in Ukraine and sanctions against Russia pushed the costs of gasoline and pure gasoline to record levels.

Although power was the main culprit, inflation in the costs of meals, suppliers and solid items exceeded the ECB’s 2% target, further proof that the progress of value is increasingly broad and is never simply a mirror image of expensive oil.

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As the ECB had consistently underestimated inflation over the previous year, the decision will come as a shock to policymakers, some of whom are already calling for stricter hedging to prevent excessive gains in value from becoming entrenched.

“The inflation figures communicate by themselves,” Joachim Nagel, president of the German Bundesbank, said on Friday. “Financial coverage should not pass up the opportunity for well-timed countermeasures.”

The governors of the central financial institutions of Austria and the Netherlands have already talked about fee hikes this year, fearing that the rapid progress in value will become widespread, an argument supported by the underlying knowledge of Friday’s launch.

Inflation, excluding risky meals and petrol costs, closely monitored by the ECB, rose to 3.2% from 2.9%, while a narrower measure additionally excluding alcohol and tobacco products rose to three.0% from 2.7%.

Any increase in Russian gasoline prices would also quickly fuel prospects, increasing costs at the same time that governments are implementing subsidy measures to offset the value.

Philip Lane, the ECB’s chief economist, acknowledged that inflation could be very excessive, but said there were opposing forces at work and that the eurozone’s central financial institution should take its time analyzing the information.

“We have the power shock, the outlook for second-round results, pushing inflation higher,” Lane told CNBC

“However, the weakening of sentiment, the truth that real incomes will suffer with excessive electricity costs, especially over a one- to two-year horizon, could have a detrimental effect on the inflation outlook.”

INFLATION SOARS, GROWTH STAGNATES

All of which leaves the ECB with an awkward hedging dilemma.

Its important activity is to bring inflation to 2%, but a tightening of coverage now would risk crushing a financial system already reeling from the fallout of the conflict in its neighbor and the persistent influence of the COVID-19 pandemic.

The ECB believes that progress in the first quarter was constructive, but barely, while progress in the second quarter could be close to zero, as excessive electricity costs are hurting consumption and business financing.

Excessive energy costs have historically been a brake on progress and can therefore really weigh on inflation as soon as the rapid peak passes, increasing the chances that the progress in value will later fall below the target.

However, the ECB can hardly ignore excessive inflation, especially because it says that the height remains at three to 4 months.

The eurozone labor market is the most tense it has been in a long time, so wage inflation, a prerequisite for robust customer inflation, is already in the pipes. And the ECB’s inaction would also increase inflation expectations, which would make the progress of value even more eternal.

The possible compromise could be that the financial institution tightens financial coverage this year, but in the smallest increments.

The markets are actually assessing the 60 basic factors of the fee hikes by the top of the year, but policymakers have been very cautious, not a single one calling for strikes so far.

The danger, however, is that strong inflationary surprises could push the ECB to tighten further shortly and catch up in a while.

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Reporting by Balazs Koranyi; Editing by Catherine Evans

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