Core EU Inflation Unexpectedly Surges To New Record High

Following disappointingly hotter than expected prints from Germany, France, and Spain; overall EU inflation slowed by less than expected in February (+8.5% YoY vs +8.3% exp vs +8.6% prior), while the euro-area’s core CPI surged to a new record high (+5.6% vs +5.3% exp vs +5.3% prior).

Bloomberg’s Jamie Rush, chief European economist, noted that “alongside a slew of hawkish remarks from policymakers, we now expect the ECB to keep hiking until June, taking the deposit rate to 3.5%. By then, core inflation should be on a firmly downward trajectory, creating space to take stock. The risk is that sticky core inflation means borrowing costs are taken further into restrictive territory over the summer.”

The speed with which food and services prices rose in February suggests inflation may remain above the ECB’s target for longer than the bank has anticipated. Recent surveys point to faster economic growth than the ECB’s economists had forecast, strengthening the hand of policy makers calling for larger rate rises.

“With ongoing high underlying inflation and food inflation, and no signs of the tight labor market weakening, the ECB is unlikely to end its rate hiking cycle any time soon,” said Peter Sidorov, an economist at Deutsche Bank.

The ECB is all but certain to raise borrowing costs by another 50bps at its next meeting in two weeks’ time, but after that the market is pricing in an increasingly higher terminal rate for ECB tightening.