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Inflation rate in the euro zone rises to 2 percent

NNot only in Germany, but also in the euro zone as a whole, inflation has increased noticeably. It rose to 2 percent in May, as the European statistical office Eurostat announced on Tuesday after an initial estimate. That is the highest level in two and a half years. It’s the fifth consecutive month of an increase. The last time inflation was higher was in October 2018. In April the rate of inflation was 1.6 percent; in the previous year it had been partially negative and prices had fallen on average.

In Germany, the inflation rate has now risen to 2.5 percent, according to the European calculation method, to 2.4 percent. In Italy (1.3 percent) and Spain (2.4 percent), inflation rates rose significantly in May. The only country in the euro zone with a negative inflation rate, in which prices are falling on average, is now Greece. In April, prices had also fallen on average in Portugal, but that is apparently over now. In France, inflation is now 1.8 percent.

According to Eurostat, the main price driver in May was once again energy costs. They rose by 13.1 percent within a year. That was even stronger than viewed in isolation in Germany. Services rose in the meantime by 1.1 percent, industrial goods by 0.7 percent and food, alcohol and tobacco by 0.6 percent.

With the May value, the inflation rate has now exceeded the European Central Bank’s (ECB) target of keeping the price increase “below, but close to, two percent”. However, the goal is “medium-term”. The ECB expects significantly lower inflation rates again for next year and has therefore so far been very cautious about monetary policy reactions to the higher inflation.

ECB meeting next week

The ECB’s target is likely to be exceeded on a monthly basis, but the central bank has so far announced that it wants to “look through” temporary fluctuations in the inflation rate in connection with the pandemic. The more the inflation rate rises, the more this strategy could be put to the test. It could already be exciting in the coming week: Then the ECB Council will meet on Thursday for a monetary policy meeting. Interest rates are unlikely to rise anytime soon – but the ECB Council is likely to wrangle over the further pace of bond purchases.

Michael Holstein, DZ Bank’s chief economist, commented: “We assume, however, that the current rise in inflation does not represent the beginning of a longer-term trend towards higher inflation rates. Rather, it is a question of adjustment reactions after a profound crisis. The inflation rate should drop below the 2 percent mark again in the coming year. “

The ECB should highlight the temporary nature of the current surge in inflation next week, says Holstein. That will probably also emerge from the updated macroeconomic projections that the ECB will present at its June meeting. In this respect, the ECB will not see any reason to think about a fundamental change in monetary policy at this point in time.

“The rise in inflation is actually relatively broad and much stronger than in the past few months,” said Karsten Junius, chief economist at Bank Sarasin. Above all, it is not only explained by special effects, higher energy and food prices or seasonal factors, but also covers all core areas of inflation measurement. “But I don’t think that the rise in inflation will shake the doves in the Governing Council,” said Junius. “You will point out that much of the rise in inflation is temporary and that monetary policy should not respond to short-term fluctuations in the inflation rate. You can also refer to the core inflation rate, which is still below 1 percent, and that, given the low wage growth, it should not rise significantly in the future either. “

“The hawks in the Governing Council shouldn’t argue with the inflation rate either,” said economist Junius: “They have better arguments for a somewhat less expansionary monetary policy.” The economy is doing well and is picking up. With the expiring Covid restrictions, you have excellent conditions for the second half of the year. In view of the pent-up consumption and production bottlenecks, there is even the potential for an extended investment cycle that will stimulate economic dynamism in the next year and beyond. “In this environment, a somewhat less strong monetary policy stimulus through lower bond purchases would be quite possible,” said Junius.

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