Inflation in the eurozone hit yet another record high in June as price pressures broadened, with its peak potentially still months away, firming the case for rapid European Central Bank (ECB) rate hikes starting this month.
Consumer price growth in the 19 countries that use the euro currency accelerated to 8.6% in June, surging past the 8.1% recorded in May, the European Union statistics agency, Eurostat said on Friday.
The reading came in higher than expectations for 8.4% and was driven primarily by energy prices, fueled partly by Russia's war in Ukraine, even as food and services also made a marked contribution.
Inflation is now at its highest level since recordkeeping for the euro began in 1997.
Inflation has risen steadily for more than a year now, initially fuelled by post-pandemic supply shocks and now by energy prices on the fallout of Russia's invasion of Ukraine.
At more than four times the ECB's 2% target, inflation is so high it is at risk of getting stuck at uncomfortable levels as businesses and workers adjust their pricing and wage behaviors to the new reality.
Indeed, even if volatile food and fuel prices are filtered out, "core" inflation remained well above the ECB's target, a distressing reading for policymakers as it suggests perpetuating price growth via so-called second-round effects.
Inflation excluding food and fuel prices accelerated to 4.6% from 4.4%, although an even narrower measure, which also excludes alcohol and tobacco, slowed to 3.7% from 3.8%.
Fuel prices rose by 41.9% in June while food costs increased by 11.1%, a particular concern for governments because lower income families spend a disproportionate portion of their cash on these items.
Demand for energy has risen as the global economy bounced back from the depths of the COVID-19 pandemic and Russia's invasion of Ukraine made things worse.
European Union leaders agreed to ban most Russian oil imports by the year's end, driving a price spike. The 27-nation bloc wants to punish Moscow and reduce its reliance on Russian energy, but it's also adding to financial pain for people and businesses as utility bills and prices at the pump soar.
Russia also reduced deliveries of natural gas used to power industry and generate electricity last month to several EU countries like Germany, Italy and Austria, on top of cutting off gas to France, Poland, Bulgaria and others.
“Importantly, the oil embargo and gas supply squeeze that unfolded over the month of June have caused energy prices to soar,” ING Bank’s senior eurozone economist, Bert Colijn, wrote in a commentary.
June inflation would have been even higher, analysts say, if Germany did not introduce temporary relief measures on fuel and transport, supporting arguments that further price pressures are still in the pipeline.
Adding to inflation pressures, unemployment fell to a record low of 6.6% in May and with apparent labor shortages crippling parts of the services sector, jobs growth could persist, pressuring wages and ultimately inflation.
With a new "inflation regime" threatening longer term price stability, central banks around the world are now tightening policy quickly, even at the cost of slowing or even crashing growth.
The U.S. and Britain have seen inflation hit 40-year highs of 8.6% and 9.1%, respectively. That has led the U.S. Federal Reserve (Fed), Bank of England (BoE) and other central banks worldwide to approve a series of interest rate hikes to combat inflation.
Lagging its peers for many months, the ECB will also start raising rates this month, initially by 25 basis points, but Friday's data strengthens the case for a bigger, 50 basis point move in September.
Rates will then continue to rise, though policymakers disagree on just how much more will be needed as growth slows and threats of gas supply cuts raise the prospect of a recession.
Colijn said the eurozone's latest “ugly inflation reading” adds pressure on the European Central Bank to act quickly.
A hike this month would mark ECB's first in 11 years, followed by another increase in September. ECB President Christine Lagarde said this week that she wants to move gradually to tackle soaring consumer prices, to avoid stifling the economic recovery, but is leaving the door open for bigger rate hikes in case inflation surges more than expected.
“I don’t think that we’re going to go back to that environment of low inflation," Lagarde said at an ECB forum Wednesday in Sintra, Portugal. “I think that there are forces that have been unleashed as a result of the pandemic, as a result of this massive geopolitical shock that we are facing now that are going to change the picture and the landscape within which we operate."
Markets price in a combined 143 basis points of rate hikes by the end of the year, indicating that increases are expected at every policy meeting over the rest of the year, with several of these in excess of 25 basis points.
At minus 0.5%, the ECB's deposit rate has been in negative territory since 2014.
Inflation in the euro area has been setting monthly records since last year, underscoring how the war's impact on global energy supplies is making life more expensive for 343 million people.
The EU data also showed countries neighboring Russia that have been trying to wean themselves off cheap Russian gas are bearing the brunt of rising prices. Annual inflation came in at 22% for Estonia, 20.5% for Lithuania and 19% for Latvia.
Poland, which does not use the euro but is an EU member, reported Friday that inflation rose to 15.6% in June compared with a year earlier, the highest rate in a quarter-century. That was an increase from the annual rate of 13.9% in May.
Analysts noted that the biggest rise in Poland was in gasoline and diesel prices, which went up 46.7% from a year ago. Food prices were up 14.1%.