The annual rate of inflation in the eurozone rose in May to hit the European Central Bank’s target for the first time since late 2018, as energy prices surged in response to a strengthening recovery in the global economy.
The pickup in price rises comes before a June 10 meeting of policy makers at the eurozone’s central bank, which will consider new economic forecasts and whether to continue stimulus programs launched early in the pandemic.
The central bank’s March forecasts saw inflation reaching 2% only in the final three months of this year. But figures released by the European Union’s statistics office Tuesday showed that inflation had already reached that level.
The central bank targets an inflation rate of just under 2%.
Consumer prices were falling as recently as December. The speed of the turnaround will likely energize a debate among policy makers about whether the pickup is a temporary consequence of economies reopening—or something more durable.
A store in Paris preparing to reopen last month as part of an easing of France’s lockdown restrictions amid Covid-19.
Photo: sarah meyssonnier/Reuters
“Everyone saw it coming, but still it is starting to make a lot of people sweat,” said Bert Colijn, an economist at ING Bank.
The pickup in inflation during May was mainly driven by surging energy prices, which were 13.1% higher than a year earlier. By contrast, prices for services were just 1.1% higher.
In a series of recent comments, ECB policy makers have said they believe that the pressures pushing prices higher will prove temporary, with inflation set to ease again next year. Inflation has fallen well short of the ECB’s target for much of the past decade, a consequence of weak economic growth.
“Inflation has picked up over recent months on account of some idiosyncratic and temporary factors and an increase in energy price inflation,” ECB President Christine Lagarde said in a news conference last month. “At the same time, underlying price pressures remain subdued in the context of significant economic slack and still weak demand.”
In the U.S., the Commerce Department’s inflation measure showed that consumer prices rose 0.6% in April from a month earlier and 3.6% from a year earlier. Core prices, which exclude energy and food, rose 0.7% over the month and 3.1% over the year.
The Federal Reserve, which aims for 2% annual inflation to keep the economy growing at a healthy pace, believes that the higher inflation stems largely from temporary factors, such as supply disruptions, and will eventually subside.
The latest annual inflation figures were skewed because of the severe recession caused by the onset of the pandemic in spring of 2020, which caused prices to drop sharply a year ago.
The strength of the forces driving inflation higher were evident in a survey of eurozone manufacturers, also released Tuesday. Purchasing managers reported to data firm IHS Markit that they were having to wait longer than at any time since the survey began in 1997 to take delivery of needed raw materials and other inputs. They also reported that the prices they paid for those inputs rose at the fastest pace on record in May, while they in turn were raising their prices.
“We expect price pressures to moderate as the disruptive effects of the pandemic ease further in coming months and global supply chains improve,” said Chris Williamson, chief business economist at IHS Markit.
However, bond investors worry that the pickup in inflation could become self-perpetuating, as workers demand higher wages and businesses raise prices again to maintain their profit margins.
Write to Paul Hannon at [email protected]
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