Euro zone inflation hits new record high of 8.1% in May

Euro-zone inflation rose to yet another record high in May, challenging the European Central Bank view that gradual interest rate increases from July will be enough to tame stubbornly high price growth.

Inflation in the 19 countries sharing the euro accelerated to 8.1 per cent in May from 7.4 per cent in April, beating expectations for 7.7 per cent as price growth continued to broaden, indicating that it is no longer just energy pulling up the headline figure.

Prices have risen sharply across Europe over the past year, initially on supply-chain problems after the pandemic, then on Russia’s war in Ukraine, suggesting that a new era of fast price growth is now sweeping away a decade of ultra low inflation.

Eurostat also estimated that Ireland’s harmonised index of consumer prices (HICP) measure of inflation rose to 8.2 per cent in May.

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This is a separate measure from the consumer price index (CPI) produced on a monthly basis by the Central Statistics Office (CSO), which put headline inflation here at 7 per cent in April. The May figure will be published next week.

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Though headline inflation across the euro zone is now four times the ECB’s two per cent target, ECB policymakers may be more worried by the rapid rise in underlying prices, which indicate that what was once seen a transitory jump in prices is now getting embedded.

Inflation excluding food and energy prices, watched closely by the ECB, accelerated to 4.4 per cent year-on-year from 3.9 per cent while an even narrower measure, that also excludes alcohol and tobacco, accelerated to 3.8 per cent year-on-year from 3.5 per cent in April.

Hoping to tame inflation, ECB President Christine Lagarde and chief economist Philip Lane have already flagged 25 basis point increases in the ECB’s minus 0.5 per cent deposit rate in July and September.

[ Energy prices and inflation expected to fall next year, says Department of Finance ]

[ David McWilliams: Ultimately, uncontrolled inflation will be followed by a recession ]

[ Inflation and higher taxes hit real wages in Ireland - OECD ]

But some policymakers and economists doubt this will be enough, especially since underlying inflation is showing no signs of abating.

The problem is that once high energy prices seep into the economy, inflation broadens out and gets entrenched, eventually getting perpetuated via a price-wage spiral.

While the evidence of such a trend is not yet clear, a string of data from a jump in negotiated wages to broadening core inflation shows a growing risk.

That is why the central bank governors of Austria, the Netherlands and Latvia have all said that a 50 basis point rate hike in July should be on the table. - Reuters