Eurozone inflation surges to 2.5% as Middle East shock starts to bite
The increase from 1.9% to 2.5% was entirely due to higher energy prices, with core inflation and food prices still falling. But the longer the shock lasts, the higher the risk of second-round effects causing broader elevated inflation.
The ECB is no longer in its 'good place'
Say goodbye to the ECB's good place. After a long period of eerily stable inflation despite global disruption, eurozone inflation has once again shot up thanks to the surge in energy prices. The price at the pump is the main culprit, with a litre of Euro-95 up almost 15% in the past month.
The other main categories of inflation didn’t show an impact so far. Food inflation dropped from 2.5 to 2.4%, and core inflation fell from 2.4 to 2.3%. Both goods and services inflation moderated, indicating that price effects outside of energy were quite benign.
A rough ride for consumers
But looking ahead, you cannot see the energy price increase in isolation. It’s all about the Middle East, which dominates the inflation outlook, and not just when it comes to energy prices, but also expect upside risk to food and goods prices given fertiliser shortages and broader supply chain problems stemming from the war. Businesses in the industry sector just increased their selling price expectations to the highest level since early 2023, for example.
And consumers expect another rough ride, the past shock still fresh in memory. Inflation expectations just increased to levels only seen in the early 1990s and during the first half of 2022. For the European Central Bank, concerns about anchoring inflation expectations around 2% will have high priority at this stage. The longer the disruption lasts, the greater the likelihood of broader increases in headline and core inflation. With much uncertainty around how the Middle East conflict will evolve, many scenarios for inflation remain possible, and that's why the ECB is right to be on high alert.
Author
Bert Colijn
ING Economic and Financial Analysis
Bert Colijn is a Senior Eurozone Economist at ING. He joined the firm in July 2015 and covers the global economy with a specific focus on the Eurozone.
