The core inflation rate in the Euro Area rose for a third successive month, hitting a fresh record high of 5.6% in February. The core CPI which excludes prices of energy, food, alcohol, and tobacco, went up 0.8%. The core number reinforces the idea that inflation remains sticky without decreases in energy prices, adding credence to the recent hawkish rhetoric from ECB policymakers.
The YoY inflation rate decreased to 8.5 percent in February 2023, the lowest since last May but above market expectations of 8.2 percent. Looking at the main components of euro area inflation, food, alcohol & tobacco are expected to have the highest annual rate in February (15.0%, compared with 14.1% in January), followed by energy (13.7%, compared with 18.9% in January), non-energy industrial goods (6.8%, compared with 6.7% in January) and services (4.8%, compared with 4.4% in January).
Looking at the individual countries, we had increased from France, Spain, and the Netherlands, with German inflation remaining steady.
THE BIGGER PICTURE AND THE ECB
The ECB’s job is challenging given the economic backdrop of the countries in the Euro area. We have seen the Euro benefit from repricing the hiking cycle expected from the ECB this week with further comments from ECB President Christine Lagarde this morning. Lagarde continued to emphasize the importance of a 50bps hike this month while mentioning that inflation is not showing signs of a stable decline.
Looking ahead to the upcoming ECB Meetings and the rest of the year, inflation, particularly the core inflation data, will likely be a driving force behind the ECB’s decisions. President Lagarde says that the need for higher rates remains while stating that data will be the driving force. In further comments, Lagarde stressed that the Central Bank is unsure about the peak rate.
Given the recent data and something I have been keen to stress of late is that the majority of inflationary pressure seems entrenched in the economy of many countries in the Euro Area, with yesterday’s German inflation report supporting this.