Euro area: Higher inflation puts the ECB under pressure – UOB

Economist at UOB Group Lee Sue Ann reviews the recently published flash inflation figures in the euro bloc.

Key Quotes

“According to flash estimates, headline inflation in the Eurozone rose to 2.0% y/y in May from 1.6% y/y in April, slightly above expectations for 1.9% y/y… Core inflation rose to 0.9% y/y for the month, from 0.7% y/y in April, recovering the losses from the March reading.”

“This is the first time since late-2018 that annual inflation in the region is above the European Central Bank (ECB)’s target of close to but below 2%. The ECB has nonetheless stressed that a rise in inflation was likely triggered by one-off factors and that the long-term outlook remains benign. Still, the central bank’s dovish tone could be challenged if inflation continues to push higher in the months ahead.”

“Even though oil prices have moved sideways since February, Eurozone petrol prices have continued to rise modestly, reaching the highest level since mid-2019 two weeks ago. This, together with base effects, pushed energy inflation higher. While base effects are moderating, it would be interesting to see if the effects from energy prices could be reduced in the months ahead. In addition, goods inflation is poised to move higher, as supply chain problems, shortages and high capacity utilisation are resulting in price pressures.”

“The discussion about whether higher inflation is indeed temporary or structural will be a very prominent debate for the months to come. Admittedly, we will probably know by the end of the year whether these drivers remain one-offs or have led to a more permanent increase in inflationary pressures.”