Inflation surges

Eurozone inflation surges to hit nearly 3-year high

ECB officials have dismissed inflation pressures as temporary.

BY JOHANNA TREECK

Eurozone inflation surged beyond the European Central Bank's just below 2 percent target in May to hit its highest level in almost three years.

Annual inflation rose to 2 percent in May from 1.6 percent in April, driven by a sharp rise in energy prices, Eurostat data released today showed. Inflation pressures varied significantly across the region, with prices accelerating to 3.1 percent in Estonia while falling 1.1 percent in Greece.

Pressures in the manufacturing pipeline are set to push prices up further in the months ahead, eurozone manufacturing PMI data showed earlier today. Survey results, based on responses from around 3,000 companies across the region, showed that average input costs again rose substantially, with the rate of inflation hitting an unprecedented level in line with widespread product shortages.

European Central Bank President Christine Lagarde and her chief economist Philip Lane have dismissed inflation pressures as temporary. “There is nearly zero connection between any kind of spikes in prices under the reopening of the economy and what goes into the inflation trend,” Lane said.

Core inflation, which excludes more volatile factors such as energy costs and food, rose to a mere 0.9 percent from the 0.8 percent reported in the previous month, highlighting that underlying price pressures remain subdued.

ECB policymakers have vowed to not react to any temporary rises of inflation and counter any renewed rise in bond yields should investors start to get nervous. "Large and lasting increases in interest rates are not justified by the current economic outlook and must be countered, including with the full deployment of the existing securities purchase programmes,” Governing Council member Ignazio Visco said Monday.

Still, last week Isabel Schnabel was the first Executive Board member to publicly mull the possibility of recent price spikes on the back of supply bottlenecks turning into a more sustained trend. “In our baseline, we assume that the factors we are seeing today are transitory. But we cannot be sure,” Schnabel told Reuters, adding that policymakers must watch price developments “very carefully.”