Euro area inflation again surprised strongly on the upside. With a reading of 7.5% yoy it skyrocketed. Much of it is due to the lastest spike in energy (4.2 pp) and unprocessed food prices (0.4 pp), amplified by the war in Ukraine. But even stripping out these factors, core inflation is still at 3.2% yoy.
Inflation embarked on a trajectory above the ECB’s 2% target. The price uptrend is broadbased with about 60% of all categories reporting rates above 2.5% yoy. Import (+11.9% yoy) and producer price (+30.6% yoy) dynamics suggest that there is much more price pressure in the pipeline. Consumers, firms and markets have also considerably adjusted their inflation expectations to the upside. And with the labour market in good shape, wage growth is likely to gain momentum over the course of the year as well.
These unprecedented inflation dynamics clearly argue for a tighter monetary policy. But there is also indication that tough times for the economy are ahead. Due to the war and its fallout expectations of firms recede and bottlenecks aggravate again. We see activity coming close to a halt in spring and summer. Hence, in March not only inflation rose again but the ECB’s headaches should have also became more painful.