Inflation gallops in Europe and it becomes increasingly difficult for the ECB to stall on the path of normalization of monetary policy. German inflation jumped beyond expectations in May, as did Spain’s. In May, overall German inflation was 7.9% on an annual basis compared to 7.4% on an annual basis in April. Harmonized inflation stood at 8.7% from 7.8% in April, well beyond expectations (Bloomberg consensus was 8%).
In detail, energy prices increased by 38.3% in May on an annual basis with a double-digit rise also in food prices (+ 11.1%). “Unless there is a sharp downward correction in energy prices in the coming months, German headline inflation will continue to rise and will only begin to stabilize towards the end of the summer,” Carsten Brzeski, Global Head of Macro at Ing.
Inflation like wildfire in all sectors
The shift to all types of sectors is still in full swing with additional price increases in the hospitality, culture and leisure sectors. “It is difficult to see a significant drop in inflation anytime soon,” explains Brzeski who, in the wake of recent geopolitical events, predicts German inflation this year on average to exceed 8% with the possibility that monthly inflation rates enter double-digit territory in the summer. According to Ing, these findings contribute to to keep the discussion alive about the possibility that the ECB decides to bring a hefty 50bp rate hike in July.
How much increase in July?
A move that at the moment seems excluded also in consideration of the latest statements by ECB President Christine Lagarde and chief economist of the ECB, Philip Lane. In an interview this morning, Lane broke with the ECB’s previous communications strategy to never commit early. The economist spelled out some sort of roadmap for monetary policy normalization, effectively announcing the end of net asset purchases in early July, a 25 basis point rate hike at the ECB meeting on 21 July and another 25 basis point increase at the September meeting.
“There is nothing wrong with the content of his remarks as it is exactly what we already expected the ECB to do. However, a de facto pre-announcement nearly two months ahead of the July 21 meeting it’s nothing short of remarkable, ”comments Brzeski, adding:“ If core inflation in the eurozone continues to accelerate in May and June, Lane and Lagarde may still regret their new pre-commitment ”.
Inflation also came in this morning Spain, which in turn went beyond expectations. The data released by the Spanish National Statistics Institute (INE) shows an annual inflation of 8.7% compared to + 8.3% in April.