Europe’s Factories Send Inflation Warning as France Overshoots

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Euro-area factories provided another signal that inflation may prove more stubborn than policy makers hope following stronger-than-expected readings from the region's biggest economies.

Manufacturers are taking a more aggressive approach to price setting, according to a poll of purchasing managers by IHS Markit that showed January output prices rising at the second-fastest rate on record.

The survey, released Tuesday, came shortly after France joined Germany and Spain in reporting consumer-price growth that was faster than analysts had estimated.

That's raising pressure on the European Central Bank to reassess its plan to exit crisis-era stimulus more gradually than counterparts in the U.S. and U.K. While inflation data due Wednesday are set to show price growth in the 19-member currency bloc slowed last month, the chances of an overshoot have risen.

“It makes it more difficult for the ECB to stick to its ‘temporary' narrative and President Christine Lagarde will acknowledge that, though I don't think she'll signal a genuine change of heart at this point,” said Natixis economist Dirk Schumacher. “For now, the data aren't conclusive enough to dismiss the ‘temporary' narrative, and I'd also still subscribe to it. But the burden of proof is clearly shifting.”

IHS Markit said there were some signs of an easing in the supply-chain problems that have stoked inflation. But with separate data showing euro-zone unemployment at a record low, robust demand is allowing firms to pass higher costs on to customers.

“Average prices charged for goods leaving the factory gate rose at the second-highest rate in almost two-decades, which points to inflation remaining elevated in coming months,” IHS Markit economist Chris Williamson said in a statement.

The final gauge of euro-area manufacturing activity, meanwhile, remained strong at 58.7, though down slightly on the initial reading of 59. The expansion accelerated in the Netherlands, Germany and Ireland, while Italy, Greece and France lost momentum.

What Bloomberg Economics Says...

“Taken together, national readings published to date point to large upside risks to consensus expectations for January euro-area headline inflation.”

-- Maeva Cousin, senior euro-area economist. For full react, click here

Consumer prices in France, the euro area's second-largest economy behind Germany, rose 3.3% from a year earlier in January, a sharper gain than the 2.9% economists estimated following December's 3.4% advance.

Energy prices were once again the main culprit, shooting up 19.7% from a year ago, with France pledging more than 15 billion euros ($16.8 billion) to shelter households. The government also moved to ensure a cap on bills by forcing state-controlled Electricite de France SA to sell more power at a discount.

But it wasn't just energy, with gains in the cost of services and food also accelerating.

“Resilient demand conditions and low production capacities have given firms a strong amount of pricing power,” IHS Markit economist Joe Hayes said, commenting on a separate survey. “Output prices rose at an unprecedented and alarming rate in January. Without improvements on the supply-side, inflation at this level could certainly become entrenched.”

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