FRANKFURT – Eurozone inflation flooded to an all-time high of 7.5 percent in March, further intensifying the European Central Bank’s policy challenge as it seeks to combat rising prices without hurting growth.
For months, inflation has been ahead of the ECB’s target and is now more than three times the 2 percent believed to guarantee price stability. In February, annual inflation was 5.9 percent.
“The war in Ukraine has exacerbated some recent price dynamics,” said Maddalena Martini, economist at Oxford Economics. “Eurozone flash inflation readings surprised again to the upside, confirming further acceleration.”
The sharp acceleration in prices was mainly driven by rising energy and food prices due to the war, preliminary Eurostat data showed on Friday. Energy prices rose to 44.7 percent from 32 percent in February.
Core inflation, which excludes volatile components of food and energy, rose to 3.2 percent in March from 2.8 percent in the previous month. The core index is closely monitored as the ECB’s indicator of medium-term price stability.
Inflation was particularly acute, reaching double digits in four member states, with Lithuania leading the field at 15.6 percent. The lowest rate was recorded in Malta, where inflation rose by 4.6 percent. But even that is more than double the ECB’s target.
Among the largest member states, inflation rose 7.6 percent in Germany, 5.1 percent in France, 7.0 percent in Italy and 9.8 percent in Spain.
All signs point to a further acceleration in prices in the coming months. Euro zone composite PMI last week showed Both input and output prices rose at a record pace in March, while the European Commission’s economic indicator reported earlier this week that sales price expectations for the next three months rose to unprecedented levels across all economic sectors surveyed.
Due to the stronger than expected inflation data, the ECB is likely to have to adjust its inflation rate upwards again inflation forecasts seen by the 5.1 percent in March.
ECB Vice President Luis de Guindos said earlier this week that inflation “will continue to rise over the next few months”, with the peak expected in three or four months before slowing again.
Meanwhile, financial markets are betting that another upward revision in inflation will prompt the ECB to hike rates sooner rather than later. Money markets are now pricing in a 60 basis point hike by year-end and four quarter-point rate hikes by March next year.
However, given the significant downside risks to growth from war and inflation, many economists believe these market expectations are overblown. While energy price increases are a temporary phenomenon that monetary policy cannot influence, more broadly speaking, weaker growth will dampen domestic price pressures – and that will make monetary policy intervention unnecessary, they argue.
“We have two forces,” said ECB chief economist Philip Lane in an interview with POLITICO earlier this week. “One is the currently high level of inflation, which risks developing its own momentum through second-round effects. On the other hand, if we see a significant downward revision in demand, that in itself means a downward revision in medium-term inflation.”
The relative strength of these forces will ultimately guide the ECB’s policy response, Lane said.
As ING economist Bert Colijn put it: “The ECB is running out of painless options to combat the current economic woes, so we expect it to tread cautiously.”
This story has been updated.
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