A Spike in Euro Area Inflation Fuels Further ECB Rate Hikes


As reported by Eurostat on Wednesday, inflation in the euro area accelerated in April, confirming preliminary data that evidence an increasingly persistent rise in prices.

The overall consumer price index went up from 6.9% to 7.0% in April since higher service and energy costs had offset the slowing rise in food prices.

The increase in the core consumer price index, which remains a focus of the European Central Bank, has slowed down a bit. That being said, the most critical component of services kept accelerating which points to an increasing pressure on salaries. This, in turn, may keep the CPI above the central bank's 2% target.

Core inflation, which does not factor in volatile food and energy prices, fell from 7.5% to 7.3%. An even narrower inflation indicator that excludes tobacco and alcohol prices demonstrated a slowdown of 5.6% from 5.7% during the first decline since June a year earlier.

The Euro Area CPI remained above the target value of 2% for more than two years, forcing the European Central Bank to hike interest rates by a total of 375 basis points.

It is likely that the monetary tightening will persist, as the return of inflation to 2% may continue until 2025. In the meantime, the decline from 3% to 2% can be particularly challenging, taking about two years.

Growth of prices for services caused mainly by labor costs accelerated to 5.2% from 5.1%. The European Central Bank has long said that a 3% rise in nominal wages meets its inflation target. However, this year's acceleration may end up being twice as high.

Further interest rate hike may be approved at the next meeting of the ECB expected on June 15.

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