Eurozone prices exceed the ECB’s targets for the first time since 2018

Eurozone inflation rose to 2% in May, the first time the rate has exceeded the European Central Bank’s target in more than two years, complicating next week’s decision on whether to stay ultra lax monetary policy.

The 1.6% jump in April followed an even stronger acceleration in consumer price growth in the US, which recently touched 4.2 percent. The rise in the eurozone is likely to fuel investor anxiety as central banks accelerate investment finishing of the large monetary stimulus launched last year in response to the coronavirus pandemic.

The ECB’s Governing Council meets next week to decide whether to adjust its monetary policy, including the recently accelerated pace of bond buying, in response to signs that economic activity and prices are rising as prices decline. Covid-19 closure measures.

Eurozone inflation has recovered after several months below zero last year, prompting most economists to predict that the rate will exceed the ECB’s target below this year, but close to 2%.

However, several ECB policymakers, including its president Christine Lagarde, have said the recent rise in inflation is only a temporary phenomenon, driven by point effects, and predicts it will fade next year. They argue that this means that central bank policy must remain very accommodating.

A year-on-year increase of 13.1% in euro area energy prices was the main factor driving the harmonized index of consumer prices in the single-currency area of ​​19 countries slightly above expectations up to at its highest level since October 2018, according to Eurostat.

Core inflation, excluding the most volatile prices for energy, food, alcohol and tobacco, rose more modestly than the overall figure, from 0.7% in April to 0.9% in May. . Blockchain services sector prices, which have been weighted by coronavirus-induced blockages, rose 1.1%.

Most economists believe that a sustained period of inflation above the euro area target is unlikely because millions of people lost their jobs, were put to work or left the workforce during the pandemic.

The ECB estimated that wage growth in the eurozone weakened further in the first quarter, to 1.4%.

Christoph Weil, an economist at Commerzbank, said: “The recession in the eurozone triggered by the crown pandemic will continue to dampen wage growth in 2021.”

Eurostat said unemployment in the bloc fell to 8% in April, its lowest level in nine months. The number of unemployed fell to 15.4 million, down 134,000 from March, but still almost 1.3 million more than in April 2020.

Andrew Kenningham, an economist at Capital Economics, said that while hiring was expected to “substantially increase” as closures were lifted, “companies will be able to turn to troubled workers, so we don’t expect that the unemployment rate will fall rapidly this year ”.

Peter Altmaier, Germany’s economy minister, said he was following the rise in inflation “very carefully” and attributed much of it to sharp rises in the price of wood, semiconductors and oil.

“As a result of the pandemic and the rapid rise in economic activity, many goods and products have been in short supply,” he said. “The real question is what [level of inflation] we should aspire to it. “

In a sign that supply-side inflationary pressures are rising, a monitored business survey released on Tuesday said eurozone manufacturers were facing unprecedented product shortages and rising prices, which which limited its ability to meet growing global demand.

IHS Markit Eurozone index of purchasing managers for manufacturing it was found “average input costs again increased substantially. . . to reach an unprecedented level in line with the widespread shortage of products ”. He said the factories “took advantage of the price improvement by increasing their own charges at the fastest pace in more than 18 years of data availability.”

According to a survey by the Ifo Institute in Munich, 44% of German construction companies have problems obtaining materials on time. “Timber prices have skyrocketed in recent months and sawmills can’t keep up,” Felix Leiss told Ifo.