Eurozone inflation surged to a four-year high last month, zooming past the European Central Bank’s target and piling pressure on rate setters to open talks about when and how extraordinary stimulus measures will be scaled back.
Inflation in the 19 countries sharing the euro rose to two per cent from 1.8 per cent in January, Eurostat data showed yesterday, the highest since the start of 2013 and just above the ECB’s target of a rate just below two per cent.
Producer price inflation, which feeds into overall inflation with a lag, meanwhile surged to an annual 3.5 per cent rate from 1.6 per cent, hinting at building pressure for underlying price growth.
Still, the ECB is likely to resist any call to step off the accelerator when it meets next week, arguing that the oil price fuelled inflation surge is temporary, growth is fragile and the outlook is fraught with uncertainty given elections in France, Germany, the Netherlands and possibly Italy.
Underlying inflation is also weak, holding steady at 0.9 per cent last month, suggesting that once the oil price surge passes through the numbers, inflation will fall back down, staying below the ECB’s target possibly through 2019.
Having missed its inflation objective for years, the ECB is keen not to move too early, worried that any market turbulence could force it to reverse course as happened when the eurozone debt crisis spiralled out of control in 2011.
Still, ECB policymakers are likely to acknowledge an improved outlook, a precursor to any discussion about rolling back its €2.3 trillion asset-buying programme and raising deeply negative rates.
Economic sentiment and manufacturing activity are at a six-year high, stock markets are surging and the eurozone economy has grown above an annual 1.5 per cent rate for eight straight quarters, its best run since before the financial crisis.
Keeping inflation-wary Germans patient may be the ECB’s biggest challenge as the politically sensitive and emotionally charged issue is bound to feature in the election campaign ahead of elections in September.
With German inflation at 2.2 per cent, real rates are in negative territory, eating into the savings of thrifty households and adding to already abundant criticism of super easy monetary policies.
Inflation is a red flag for many Germans whose families suffered from depreciation of money and mass unemployment in the 1920s.
German households also prefer relatively simple savings products with lower but safer returns, a problem when real return turn negative. With overall savings of €5 trillion and interest rates at zero, an inflation of two per cent means German savers are basically losing €100 billion per year, Bavarian Finance Minister Markus Soeder said on Wednesday.
Policymakers earlier suggested that any discussion about the bank’s next step would likely start in June with a decision coming only after the summer.