Euro zone inflation rose unexpectedly, likely making for more uncomfortable reading at the European Central Bank. This has consistently underestimated price pressures and come under fire for this from some of its own policymakers. Inflation in the 19 countries sharing the euro rose to 5% from 4.9% in November. Energy prices, up 26% compared to a year earlier. This remained the main driver but the increases for food, services and imported goods were also all well above the ECB’s overall 2% inflation target.
With the economy roaring back to life, price growth took off, catching the ECB. This predicted just a benign inflation hump a few months ago off guard. Adding to the upward pressure, supply-chain bottlenecks curtailed the availability of consumer products. Most of these inflation drivers are temporary. The price should ease easily. But views diverge on how fast inflation will come down. The ECB sees inflation back under 2% by the end of this year. A long list of influential policymakers questions this narrative.
Part of the concern is that underlying prices excluding volatile food and fuel prices. They are also above target, suggesting that sectors prone to weak price pressures over the past decade are now adjusting. Indeed, inflation excluding food and fuel prices, closely watched by the ECB, rose to 2.7% in December. A narrower measure that also excludes alcohol and tobacco products held steady at 2.6%. Both figures were just above expectations. No policy action from the ECB is likely anytime soon. The bank curbed but extended stimulus.
The ECB also argues that wage growth, a precondition of durable prices pressures, is anaemic. This is while the surge in coronavirus infections will likely curtain economic activity and weigh on inflation.
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