Inflation in the eurozone hits a record high for the fourth month in a row in February, raising questions about when the central bank should step in to ease the pain to people's wallets while Russia's invasion of Ukraine rattles the global economy.
The reading intensifies a policy dilemma for the European Central Bank (ECB), which must convey a sense of calm amid war-related market turmoil but also respond to mounting price pressures.
Consumer prices in the 19 countries that use the euro currency increased by an annual 5.8% in February, the highest figure in the bloc’s two decades, the European Union statistics agency Eurostat reported Wednesday.
The reading beat expectations for 5.4% and also confounded the ECB’s own projection for a drop.
The latest numbers underscore continuing pain for the continent's consumers and pile more pressure on the ECB as it grapples with when and how to raise interest rates to ease inflation.
The latest inflation reading smashed the record of 5.1% set last month to reach the highest level since recordkeeping for the euro started in 1997.
Inflation in Europe, as in other major economies, has been fueled by surging energy prices, and the problem will be complicated by Russia's invasion of Ukraine.
Russia, a major oil and gas producer, has been hit with sanctions and export restrictions that have raised worries that supplies could be cutoff, though that hasn't yet materialized.
A 32% jump in energy costs drove inflation last month but unprocessed food prices were also up sharply, rising 6.1% and making inflation especially painful for lower-income families.
With energy prices soaring due to Russia’s war in Ukraine, inflation is all but certain to accelerate even further in the coming months, analysts say, and could average around 5% or more this year, more than twice the ECB’s 2% target.
As price pressures had been building for months, the ECB was all but certain to accelerate its exit from the ultra-easy policy at its meeting next week.
But the war has thrown those plans into turmoil, leaving the policy outlook uncertain.
Still, policy hawks have not fully abandoned their calls for a tighter policy as price pressures are now broad and not merely a function of a spike in oil prices.
“If price stability requires it, the ECB Governing Council must adjust its monetary policy course,” Bundesbank President Joachim Nagel said. “We need to keep our sights trained on the normalization of our monetary policy.”
Nagel, however, stopped short of making a case for the ECB to curb stimulus already on March 10.
Hawks argue that given a surge in underlying inflation, which filters out volatile fuel prices, maintaining exceptional stimulus is inappropriate.
The problem for the ECB is that, while war is likely to boost prices above all forecasts this year, it is a negative for both growth and inflation in the longer term, a horizon that is more relevant for the central bank.
High energy costs sap household purchasing power, eat into corporate margins and weigh on investment. They are also likely to impact the price of other goods and services, particularly food prices, as natural gas is the highest cost in fertilizer production.
Meanwhile, financing conditions have already tightened, mainly due to falling share prices, particularly a 25% drop in the eurozone bank index since mid-February.
ECB board member Fabio Panetta, an outspoken policy dove, has already made the case for holding off on any further policy tightening.
ECB Vice President Luis de Guindos, considered a centrist, acknowledged that the February inflation figure was a negative surprise but warned that war will dent growth.
“It is to be expected that the conflict through the macroeconomic channel and the channel of confidence and sentiment in the markets will end up having an impact from the point of view of higher inflation and lower economic growth,” de Guindos said.
Inflation excluding food and energy prices accelerated to 2.9% in February from 2.4% the previous month and an even narrower measure, which excludes alcohol and tobacco, rose to 2.7% from 2.3%.
Hawks also argue that ordinary people are increasingly feeling the pain of high inflation, so it is also politically risky for the central bank not to act.
Markets, which priced in 50 basis points of interest rate hikes this year just weeks ago, now only see around 15 basis points worth increases. German 10-year yields, in positive territory in February, hit minus 0.41% on Wednesday as investors reprice the policy outlook.
The ECB will next meet next Thursday and the policy decision remains wide open and subject to developments in Ukraine.
