Core inflation dips but ECB on edge

52
2
Core inflation dips but ECB on edge

While inflation in the euro zone fell more than expected, the retreat is unlikely to stop the European Central Bank from raising interest rates further.

Consumer prices excluding items like fuel and food advanced by 5.3% from a year earlier in May, down from April's 5.6% increase and less than the 5.5% median estimate in a Bloomberg survey of economists.

The headline gauge rose to 6.1% - its lowest level for more than a year - driven mainly by lower energy costs.

The data also include big slowdowns for the top four economies in the 20-nation euro area and will be welcomed by politicians and monetary policymakers as the continent s citizens struggle with a bruising cost-of-living crisis.

But the unpredictability of the core measure means that ECB officials plan to extend their unprecedented tightening campaign in two weeks time, despite Germany recently slipping into a recession and financial dangers still swirling.

Investors and economists widely expect another quarter-point move on June 15 and forecast there ll probably be one more to round off the cycle, which has already brought the deposit rate to 3.25% from below zero last July.

commenting on the National Data, ECB Vice President Luis de Guindos said victory over inflation, which hit 10,6 at its peak, hasn't yet been achieved.

I think that we are on the correct trajectory, he said. The evolution of core inflation is a complex matter. However, Madis Muller, Estonia's chief financial officer, said there 'll probably be more than one additional quarter-point hike - warning that underlying price pressure unfortunately shows no signs of slowing yet. It s a similar view to Bloomberg Economics s Maeva Cousin, who said Core inflation is likely to tick up again in June, keeping the ECB on edge through the summer. Policymakers call for bringing consumer prices back to the 2% target to underpin economic expansion and financial stability, with both sectors experiencing the effects of rising rates.

Moreover, the ECB warned this week that tighter policy is causing financial markets to be at risk of negative shocks and are testing the resilience of households, companies, governments and the real-estate sector.

However, they remain dedicated to tackling prices, which necessitates not just raising borrowing costs but maintaining them once they reach their peak.

Yes, headline inflation is coming down as we start to see the food and energy shocks dissipate, said Laura Cooper, the senior macro strategist for ishares EMEA.

But clearly, the services inflation, the core gauges, continue to show price persistence and that does suggest that the ECB will have to keep rates in limited territory for quite some time, she said.