Euro Zone Inflation Reaches 3.0% in April, Pushing ECB Towards Rate Hikes
April Inflation Data and Implications for ECB Policy
Headline and Core Inflation Trends
FRANKFURT, April 30 (Reuters) - Euro zone inflation surged further in April on soaring energy costs, Eurostat data showed on Thursday, adding to the case for interest rate hikes, even if benign underlying price growth figures ease the urgency of any move.
Inflation in the 21 countries sharing the euro currency jumped to 3.0% this month from 2.6% in March, moving further above the European Central Bank's 2% target, with energy costs accounting for the vast majority of the increase.
Core Inflation and Sector Breakdown
A closely watched figure on underlying or 'core' inflation, which excludes volatile food and energy prices, meanwhile slowed to 2.2% from 2.3% a month earlier.
Services inflation, a stubbornly high component of the price basket over the past several years, slowed to 3.0% from 3.2% while inflation for non-energy industrial goods, a key drag on prices picked up to 0.8%.
ECB Policy Response and Market Expectations
The figures are a mixed bag for the ECB, which is meeting on Thursday and will likely keep interest rates unchanged, even if it signals that policy tightening is increasingly likely.
Arguments for and Against Immediate Rate Hikes
The high headline inflation print strengthens the argument for interest rate hikes but the underlying figures suggest that the initial energy shock is not yet creating major second round effects.
ECB's Role Amid Energy Shocks
The ECB is largely powerless against an energy shock but must step in if these second round effects become visible as they risk creating a hard-to-break self-sustaining inflation spiral.
Investor Expectations and External Factors
This is why investors expect the ECB to hike its 2% deposit rate already in June and see at least two more moves before the end of the year.
Impact of Geopolitical Events and Oil Prices
This outlook is volatile, however, and largely depends on developments in the Iran war and oil prices, which hit a four-year-high of $124 on Thursday.
(Reporting by Balazs KoranyiEditing by Alexandra Hudson)
