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Inflation in the eurozone has reached its highest level since the coronavirus pandemic hit last year, ending a five-month period of price decline and fueling investor doubts about whether the Bank Central European Union must use more stimulus measures.
Headline consumer price inflation hit an 11-month high of 0.9% in January, down from minus 0.3% in December, according to a flash estimate published by Eurostat on Wednesday. Economists polled by Reuters had expected just 0.5%.
The fastest jump in more than a decade was driven by a combination of one-off factors rather than a rebound in underlying demand as many stores, schools and recreation areas in the bloc remain closed due to lockdowns to stem the spread of the virus.
The reversal of a temporary cut in German value added tax earlier this year has played a role, as have rising energy costs and supply chain disruptions that have increased container shipping prices for retailers and manufacturers.
Analysts expect clothing and footwear prices to be higher in January compared to a year ago due to the seasonal sales delay as many stores are closed in countries like France, the ‘Italy and Germany.
Core inflation – excluding energy and food prices, which are generally more volatile – fell from 0.2% in December to 1.4% in January.
An annual review of the weights used to calculate inflation also pushed up average prices, as more weight was given to products for which demand had increased, such as food, and less to products affected by the pandemic, like package holidays.
Analysts expect the sharp rise not to hold over into 2022, even if there is an economic rebound fueled by vaccination in the second half of the year.
“We expect inflation to fall again, as we believe the impact of the pandemic recession will ultimately prove to be disinflationary,” said Andrew Kenningham, economist at Capital Economics.
The ECB forecast in December that price growth would drop from 0.3% in the first quarter of this year to 1.5% in the fourth quarter, before falling back to 1.2% a year later – still below its target lower but close to 2 percent.
Richard Barwell, head of macro research at BNP Paribas Asset Management, said the ECB would likely continue to “look through this rise in inflation because it thinks it is transitory” – adding that after under – exceeded its target for many years, the central bank would be cautious before reacting to the recent surge in prices.
“I still think that in a year, core inflation will be stuck around 1 percent rather than approaching the 2 percent target,” Mr. Barwell said. “We have seen a sharp drop in unemployment in the eurozone in recent years and that still hasn’t pushed inflation up to the ECB’s target, so I’m not convinced Europe will escape too easily to its low inflation trap.
Conservative commentators in Germany have long feared excessive inflation and fear that the ECB’s loose monetary policy could cause the economy to overheat. German inflation Pink faster than in most euro areas in January, falling from minus 0.7% in December to 1.6%, according to a preliminary estimate released last week.
Morgan Stanley analysts said they “continued to see weak underlying price pressures and only a gradual pick-up in core inflation, given the sharp easing in the labor market,” adding that ‘They’ expect the ECB to examine and denounce the current peak. “.
Investors did not seem concerned about the risk of a tightening of ECB policy. 10-year Italian government bond yields responded to the ad that former ECB President Mario Draghi was due to form a new government in Italy with its biggest one-day drop in eight months, falling 10 basis points to 0.55 percent.
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