(Bloomberg) – Underlying inflation in the euro zone hit a record in March, giving ammunition to European Central Bank officials who say rate hikes are not over.
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The rise in core price to 5.7%, which excludes volatile factors such as fuel and food costs, came alongside a record fall in headline inflation to 6.9% from 8.5% in February.
As energy surge falls out of inflation readings following Russia’s attack on Ukraine, ECB officials are increasingly focused on the underlying metric – reflecting concerns over firms raising prices and workers demanding higher salaries to make up for lost purchasing power to balance.
Divergence between the two price measures can be seen across the region’s largest economies, with underlying price growth in Spain showing little sign of slowing, although the headline figure almost halved to just 3.1%.
Money markets appeared to be focused on the fall in headline inflation and trim bets on rate hikes. Investors are touting a high of 3.61% through October, compared to 3.71% before Friday’s data. Germany’s two-year yield was 2 basis points higher at 2.73% after earlier rising to 2.83%.
The ECB raised interest rates to 3% last month but gave no guidance on next steps, citing the financial turmoil. Since then, however, several policymakers have insisted that further tightening will be necessary.
What Bloomberg Economics Says…
“The March inflation reading supports further tightening by the ECB. This follows comments from even dovish policymakers about the need for further rate hikes now that stress in the banking sector has eased.”
—Maeva Cousin, Senior Economist. Click here for the full REACT
After raising interest rates by 3.5 percentage points since last July, ECB President Christine Lagarde said this month that officials “will expect a sustained downward turn in underlying inflation measures to give confidence that the path of inflation is closer to our target over the medium term.”
The return to that 2% target has become more complicated in recent weeks due to the turmoil in the financial sector, culminating in UBS Group AG’s takeover of Credit Suisse Group AG.
While the shift could lead to more restrictive lending – a disinflationary force – “it’s completely open for now how big that effect will be,” ECB Executive Board member Isabel Schnabel said this week.
For now, bank stress is easing – prompting more hawkish ECB policymakers to push for further increases in borrowing costs.
Such demands are supported by an economy that has shown surprising resilience in the face of the energy crisis. S&P Global surveys pointed to firmer activity in March, albeit driven solely by the service sector.
The labor market remained resilient even during the war in Ukraine, with separate data on Friday showing unemployment held steady at 6.6% in February.
However, such developments can also have a downside. ECB economists warned in a blog post on Thursday that a feedback loop of higher wages, rising corporate profit margins and rising prices “risks strong second-round effects”.
–Assisted by Joel Rinneby, Alessandra Migliaccio, Barbara Sladkowska and James Hirai.
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Source : finance.yahoo.com