Thomas Lyons 
Eurozone Inflation Eases for the First Time in 10 Months
For the first time in 10 months, underlying inflation in the eurozone has eased, lending support to the argument for the European Central Bank (ECB) to slow down its aggressive interest-rate hiking campaign later this week. According to the report, consumer prices, excluding volatile items such as fuel and food costs, rose 5.6% from a year ago in April, compared to March’s 5.7% advance. However, the headline inflation rate increased slightly to 7%, exceeding analysts’ expectations of 6.9% and still far above the 2% target. The acceleration was driven by services prices and a less favourable annual comparison for energy costs than in March.
In April, the Eurostat measure showed that Irish headline inflation slowed slightly to an annual rate of 6.3%, down from 7% in March. This report could further tilt the debate over how much the ECB should raise borrowing costs towards those advocating a downshift to a quarter-point. Arguments to maintain the half-point pace of recent meetings are weakened as the core price gauge is now heading lower and a survey of bank lending published earlier showed credit standards tightening by more than lenders had expected. Having already enacted 350 basis points, or 3.5%, of tightening since last summer to beat back the euro era’s most severe bout of inflation, economists and investors reckon policymakers will opt for the smaller of the two rate moves. Money-market wagers see only a 20% chance of the bigger increase materialising, down from more than 30% last week. A Bloomberg poll showed the deposit rate, currently at 3%, may peak at 3.75% in July.
Bloomberg Economics chief European economist Jamie Rush said, “The absence of any material upside surprises in the April inflation statistics is the main take-away from the report.” With the main gauge of price gains down from its double-digit peak thanks to the reversal in natural gas costs, the ECB has zeroed in on underlying pressures as the key factor in its decision-making. The measure has been driven largely by robust demand for services after consumers emerged from the pandemic with pent-up demand and stacks of savings. However, officials have also begun looking more closely at the role of fatter profit margins, while the strongest pay demands in years remain a concern. The ECB is particularly concerned about the interaction of those dynamics.
Last week, ECB Vice President Luis de Guindos said that “any sort of conflict between wages, profits, and the public sector would be extremely detrimental,” with the potential to trigger a reaction from the central bank. ECB Executive Board Member Isabel Schnabel has warned that the persistence of core pressures and strong momentum in food costs mean “it’s far too early to declare victory on inflation.” She said officials do not only need to see a turning point but a sustained decline “that gives us confidence that our measures are starting to work.” The latest bank lending survey showed that credit standards “tightened further substantially” in the first quarter.
