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inflation

In the eurozone, inflation is at an all-time high.

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Last month, Eurozone inflation surged to a new record high, defying forecasts for a significant decline and putting pressure on the European Central Bank to finally concede that price increase is not as fleeting and benign as it has long promised. 

Inflation in the 19 eurozone nations rose to 5.1 percent in January from 5 percent in December, significantly above forecasts in a Reuters poll of analysts for a decline to 4.4 percent, according to Eurostat data released on Wednesday. 

The number reflected rising energy prices, as predicted, but unprocessed food inflation increased more than 5%, putting the ECB under political pressure because rising fuel and food prices have a rapid impact on regular people.

Inflation is now more than double the ECB’s objective of 2%. 

For months, the central bank, which will convene a policy meeting on Thursday, has dismissed statistics showing rising prices, claiming that the surge is due to transient reasons and that inflation will subside shortly on its own. 

However, the ECB’s track record in projecting inflation is mixed. It forecasted a peak in November, then December, and was forced to revise its forecasts numerous times last year. 

They must recognise that there are downside risks, and the (inflation) path they outlined in December is too benign. Underlying pricing pressures remain considerable, putting the ECB in a difficult position.

While the U.S. Federal Reserve has abandoned the narrative that inflation is “transitory,” the ECB has stuck with this assessment, arguing that wage growth, a precondition of durable inflation, is still muted and underlying price growth is weak.

Although core inflation slowed, it remained above the ECB’s target and also beat market expectations by a wide margin.

The ECB regularly monitors inflation excluding food and fuel costs, which fell to 2.5 percent from 2.7 percent, while a tighter measure that also excludes alcohol and tobacco items slowed to 2.3 percent from 2.6 percent. Both results were significantly higher than expected. 

Despite the ECB’s warning that any rate move is “extremely improbable,” markets expect 30 basis point interest rate rises by the end of the year. 

“In the first quarter, eurozone headline inflation is expected to surpass ECB staff predictions by more than 100 basis points. We now anticipate the ECB raising its deposit rate by 25 basis points in March and June 2023.”

Analysts surveyed last month projected the first ECB rate rise in the second half of 2023, but while inflation continues strong, a rising percentage sees quicker movements. 

The euro gained 0.3 percent to $1.13050, reaching a one-week high against the dollar, as investors evaluated the likelihood that the ECB would imply a quicker pace for policy tightening on Thursday. 

The ECB forecasts inflation to fall back below 2% by the end of the year, owing in part to poor wage growth. However, a lengthy list of notable officials has questioned this storey, noting that risks are biassed toward larger estimates.

While pay growth has been slow thus far, unemployment fell to 7% in December, an all-time low for the eurozone, and is already well below the ECB’s own estimates, implying that wage pressures may surpass projections as well. 

After expanding support through a complicated package in December, ECB officials gathering on Thursday are largely set to maintain policy unchanged. 

While ECB President Christine Lagarde may agree that inflation may surpass estimates, she is also anticipated to push back on rising rate rise expectations, saying that any adjustments this year are improbable.

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