Eurozone Inflation Surprises the ECB, Jumps to 2% in May

Eurozone Inflation Surprises the ECB, Jumps to 2% in May

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Key Takeaways

• Eurozone annual inflation rate for May jumped above ECB’s target for the first time in 2 years
• Spike in prices for May was primarily driven by higher demand for energy-related products

Eurozone inflation has surpassed the European Central Bank’s target of just below 2% sooner than anticipated by the ECB’s governing council. May saw a pickup in the annual rate of inflation in the euro area and for the first time since late 2018, prices spiked to 2%, according to data released from Eurostat on Tuesday.

The jump from 1.6% in April highlights a concerning trend that has the potential to fuel investor anxiety similar to the impact of higher prices in the US where inflation rose to 4.2% in April. The European Central Bank had forecasted in March that inflation would reach 2% only in the final three months of this year.

The eurozone’s rapid increase in prices is likely to put pressure on the European Central Bank to consider winding down the ample monetary support launched last year when the pandemic hit the European economy. May’s spike in prices was driven primarily by surging energy prices, which were 13.1% higher than the same period a year ago. Prices for services, on the other hand, rose just 1.1%. Core inflation, which excludes the more volatile industries, such as energy and the food sector, rose 0.9% in May from 0.8% in April.

The ECB’s governing council is set to meet next week, on June 10, and decide whether to scale back its monetary stimulus, which was recently accelerated to over €20bn of bond purchases per month, against the backdrop of the economic reopening which has been boosting social and business activities. Previous plans by ECB officials have forecasted that the central bank would keep net purchases going until at least 2022 and they will stop only if the pandemic crisis is over.

Lagarde Weighs In on Inflation

In a series of recent comments, several policymakers at the ECB, including ECB President Christine Lagarde, have dismissed inflation pressures as temporary. ECB’s chief economist Philip Lane said earlier in May there is “nearly zero connection between any kind of spikes in prices under the reopening of the economy and what goes into the inflation trend.”

A little over a week ago, President Lagarde reiterated she believes inflation will fall despite the swift rebound in eurozone economic activity. She claimed that inflationary pressures were “of a temporary nature”. Still, she said the ECB is confident that pricing pressures will “return to lower levels” in 2022. “We should see through a higher period of inflation because the underlying factors and fundamentals are certainly not there to let us . . . forecast that inflation will stay at these levels.”

ECB governing council member Ignazio Visco said on Monday that an upside swing in prices was not necessarily bad for the eurozone economy given that higher prices are fueled by one-off factors. “Large and lasting increases in interest rates are not justified by the current economic outlook and must be countered, including with the full deployment of the existing securities purchase programmes,” Mr. Visco said.

Still, May’s two-year inflation spike to 2% has some investors worried that the US surge in consumer prices could have a spillover effect and hurt investors’ confidence in the European markets which this year have been stretching to record highs.