Head of Macroeconomic Research
Summary: Inflation is still running hot in the eurozone. The headline is well-above the consensus in February, at 5.8 % year-on-year versus 5.3 % expected. The Eurostat report covers the period before the recent increase in energy prices related to the invasion of Ukraine by Russia. Therefore, inflation will likely jump more substantially in March, above 6 %. We estimate that the ongoing events in Eastern Europe will add one percentage point to inflation this year.
Eurozone inflation is up once more : Eurozone consumer price index (CPI) rose 5.8 % year-on-year in February after 5.1 % in January (see Chart), markedly above the market consensus of 5.3 %. Energy prices contributed substantially – they surged 31.7 % year-on-year in February after 28.6 % in January. Expect energy prices to continue rising in the short term due to the Ukrainian conflict. Oil prices stand now well-above the $100 threshold. The recent increase in wholesale oil and gas prices will be probably largely passed on to consumers in the coming months. Energy is not the only factor pushing inflation higher. Goods inflation is now at 3 % year-on-year. It will likely remain elevated at least for the first part of this year due to supply chain disruptions hitting food commodities. As a result, core CPI jumped too, from 2.3 % year-on-year in January to 2.7 % in February. The decrease noticed in January due to the German VAT effect is completely erased.
Inflation is jumping in all eurozone countries : Italy was a major reason for the strong rise in the eurozone inflation. The headline rose 6.2 % year-on-year, up from 5.1 % January. The marked rise in Italian inflation is in line with the results from other eurozone countries which had already reported their EU-harmonized inflation figures :
· France to 4.1 % in February from 3.3 % in January
· Germany to 5.5 % in February from 5.1 % in January
· Spain to 7.5 % in February from 6.2 % in January
ECB dilemma : In the short term, we believe the ECB will hold off on policy move until Ukraine clarity. Next week’s Governing Council meeting will mostly focus on the impact of the conflict on inflation and financial stability. We estimate that the Ukraine conflict will add one percentage point to the eurozone inflation this year. The headline rate for March (first estimate released on 1 April) will be above 6 %, without any doubt. In the medium term, the combination between the green transition, the structural lack of investment in energy infrastructures and the troubled situation in Ukraine will constitute a new inflation shock that the ECB will need to address. Eurozone inflation is now uncomfortably high. This is not transitory anymore. Real income squeeze will be massive for the eurozone households. ECB's hawks have temporarily leaned towards the status quo because of the war. But once the geopolitical situation will be stabilized, they will certainly be very vocal in favor of a tightened monetary policy to fight inflation. Expect a heated debate within the ECB about the opportunity to raise interest rates earlier than anticipated.
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