Fueled by soaring energy prices, annual inflation in the eurozone has hit a record level for the third month in a row, official data showed on Wednesday, extending stress for consumers and piling pressure on the European Central Bank (ECB).
The consumer price index (CPI) in the 19 countries using the euro soared by an annual 5.1% in January, the European Union statistics agency Eurostat reported. The figure, for instance, far outpaced expectations in a Reuters poll of analysts for a drop to 4.4%.
The inflation broke a record of 5% in December and 4.9% in November and was the highest since recordkeeping started in 1997.
Once again, soaring energy prices played a major role. Oil prices have risen as the global economy recovers from the worst of COVID-19 restrictions, while natural gas prices have surged in Europe because of depleted winter reserves, lower supplies from Russia and fears of a renewed military move by Moscow against Ukraine.
The unprocessed food inflation also jumped more than 5%, a potential source of political pressure on the ECB as fuel and food prices impact ordinary voters quickly.
Inflation is now more than twice the ECB’s 2% target.
Patchy forecast record
The central bank, which will hold a policy meeting on Thursday, has for months shrugged off data showing prices climbing, arguing that temporary factors are behind the rise and inflation will soon abate on its own.
But the ECB’s track record in forecasting inflation is patchy. It predicted a peak first in November then December, and was forced several times last year to sharply raise its projections.
"They have to recognize there are upside risks and the (inflation) path they laid out in December looks too benign," said Dirk Schumacher, eurozone economist at the French investment bank Natixis. "Underlying price pressures remain high and put the ECB in an awkward position."
While the United States Federal Reserve (Fed) has abandoned the narrative that inflation is "transitory," the ECB has stuck with this assessment, arguing that wage growth, a precondition of durable inflation, is still muted and underlying price growth is weak.
The Fed has signaled it could begin a series of rate increases as early as March amid inflation that is at a 40-year high.
The ECB thinks inflation will decline sharply this year and fall to 1.8% in 2023 and 2024.
Although core inflation slowed last month, it remained above the ECB’s target and also beat market expectations by a wide margin.
Inflation excluding food and fuel prices, closely watched by the central bank, slowed to 2.5% from 2.7% while a narrower measure that also excludes alcohol and tobacco products slowed to 2.3% from 2.6%. Both figures were well above expectations.
High inflation is why markets see 30 basis points of interest rates hikes by the end of the year, despite the ECB’s insistence that any rate change is "very unlikely."
"Euro area headline inflation is on track to exceed ECB staff projections by more than 100 basis points in the first quarter," Pictet Wealth Management strategist Frederik Ducrozet said. "We now expect the ECB to bring its deposit rate back to zero in two 25 bp rises in March and June 2023."
Analysts polled last month expected the first ECB rate hike only in the second half of 2023 but a growing number see earlier moves as inflation remains high.
Questions
The ECB expects inflation to fall back under 2% by the end of this year, partly because of weak wage growth. A long list of influential policymakers have questioned this narrative, however, warning that risks are skewed towards higher figures.
While wage growth is indeed weak so far, unemployment fell to 7% in December, an all-time low for the eurozone, and is already well below the ECB’s own forecasts, suggesting that wage pressures could also exceed projections.
The ECB policymakers meeting on Thursday is almost certain to keep policy unchanged after extending stimulus through a complex package in December.
While ECB chief Christine Lagarde may acknowledge that price pressures continue to beat projections, she is also expected to push back on mounting rate hike expectations, repeating her long-standing stance that any rate changes this year are unlikely.