Euro-Zone Inflation Hits Record As ECB Mulls How Quickly To Hike

(Bloomberg) --

Euro-zone inflation accelerated to an all-time high, intensifying the debate at the European Central Bank about how rapidly to raise interest rates from record lows.

Consumer prices jumped 8.1% from a year earlier in May, exceeding the 7.8% median estimate in a Bloomberg survey. The acceleration was driven by food and energy after Russia's invasion of Ukraine sent commodity prices soaring. A gauge that excludes volatile items like those rose 3.8%.

With rate hikes in full swing in the US and the UK, the ECB is preparing to lift borrowing costs for the first time in more than a decade to combat the 19-member currency bloc's unprecedented price spike.

President Christine Lagarde indicated last week that quarter-point increases are likely at meetings in July and September. Chief economist Philip Lane backed that timeline on Monday, calling moves of that size a “benchmark pace” in exiting stimulus, which also includes large-scale bond-buying.

Some officials have floated the idea of hiking by a half-point for the first time in the ECB's history -- mirroring the latest Federal Reserve decision. Dutch Governing Council member Klaas Knot has said inflation numbers for May and June will determine whether such a step is warranted. 

Slovakia's Peter Kazimir, who holds a centrist position in the ECB rate setting body, told Reuters on Tuesday that while his baseline scenario for July is a quarter-point hike, he's open to talk about a 50 basis-point move.

Italy's Ignazio Visco pushed back on Tuesday against the prospect of a more aggressive rate step, saying the ECB must proceed in an “orderly” manner to avoid potential bond-market turbulence. His French colleague, Francois Villeroy de Galhau, said the latest inflation data warrant a “gradual but resolute” normalization of monetary policy.

“A rapid slowdown in inflation in the euro area isn't in sight,” said Christoph Weil, an economist at Commerzbank. “Even if there's no interruption in Russian oil and gas supplies and if the year-on-year increase in energy prices falls significantly as the year progresses, the inflation rate will probably still be around 6% by the end of the year.”

German bonds dropped across the curve with benchmark 10-year yields rising seven basis points to 1.12%. Italian bonds lagged, with equivalent yields rising 13 basis points to 3.13%, while the euro fell 0.7% to $1.07. Money markets added to ECB rate-hike wagers, pricing 119 basis points of tightening by December.

While price growth should peak this quarter, it will still average more than the ECB's 2% target next year, according to European Union forecasts. A European Commission survey this week showed inflation concerns among consumers retreating, though remaining double the average level since 2000. 

Russia's attack on its neighbor -- and the response it's prompted -- remains the biggest risk to the euro-area economy.

Manufacturing has slowed amid soaring input prices and renewed supply-chain snarls. An EU ban on Russian oil, meanwhile, risks further stoking pressure on prices, which are rising partly as the war disrupts wheat and fertilizer supplies.

European governments have implemented an array of measures to ease the burden on households. Even so, prices rose by records this month in France, Italy and Spain.

After German inflation reached 8.7%, Finance Minister Christian Lindner on Monday called the fight against it the “top priority,” while advocating an end to expansive fiscal policy. 

(Updates with Kazimir in sixth paragraph)

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