Eurozone inflation soared to a new record high of 8.1 per cent in the year to May, piling pressure on the European Central Bank to speed up the pace of its exit from ultra-loose monetary policy.
The jump in eurozone price growth, from 7.4 per cent the previous month, was much higher than forecast by economists, who had expected 7.7 per cent, according to a Reuters poll. The core number, which excludes more volatile energy and food prices and is closely watched by ECB policymakers, also rose above expectations to 3.8 per cent, up from 3.5 per cent in April.
The higher than expected core measure, which signals price growth is gathering pace across most categories of goods and services, could tip the balance at the ECB’s meeting in Amsterdam next week in favour of raising interest rates at a more aggressive pace than currently outlined.
The ECB’s chief economist Philip Lane signalled earlier this week that the bank would raise rates 0.25 percentage points in July, and the same amount in September, saying this margin was the governing council’s “benchmark”. However, hawks are likely to push for a half percentage point rise at the July 21 vote.
“These data are too hot to handle,” said Claus Vistesen, an economist at Pantheon Macroeconomics. “The risk of a 50 basis point hike [in interest rates] in July is very real, and we’d even argue that next week’s meeting is live.”
Most ECB governing council members accept that the rise in inflation to quadruple its target of 2 per cent requires them to start raising its deposit rate, which is at minus 0.5 per cent and has been stuck in negative territory since 2014. But there are divisions over the pace of the move.
President Christine Lagarde has urged the council the the council to move “gradually” by raising rates a quarter percentage point in July and September, following the end of the ECB’s bond-buying programme in early July.
“Had they not boxed themselves in by promising to continue asset purchases until the third quarter, the ECB would surely be raising rates at next week’s governing council meeting,” said Andrew Kenningham, an economist at Capital Economics.
Inflation has been pushed higher by the fallout from Russia’s invasion of Ukraine, which has sent energy and commodity prices surging and added to global supply chain disruption, while the lifting of Covid-19 restrictions has boosted demand across Europe.
Energy prices increased 39.2 per cent in the year to May, while the price of food, alcohol and tobacco grew at an annual rate of 7.5 per cent, according to data released by Eurostat on Tuesday.
The sharp rise in prices, which hit a record high in Germany of 8.7 per cent in the year to May, as well as rising in France, Spain and Italy, has prompted politicians to announce measures to offset the impact on households and businesses with subsidies, electricity price caps and tax rebates.
The fastest rate of inflation in the 19-member eurozone was 20.1 per cent in Estonia, while the slowest was 5.6 per cent in Malta.