Don’t Panic, Europe. That’s Not Inflation. It’s Just Gas.
(Bloomberg Opinion) -- Ouch. A record high of 5% for euro area inflation in December will cause a few red faces at the European Central Bank, which had been hoping that 2021 had already seen the peak. It was only a 0.1% uptick from the prior month. But the average of a wide range of forecasts was for 4.8%. So it was a miss. But why the consternation? On balance, there is nothing to see here. ECB policy is not going to change.
So be patient and breathe easier. It'll be a month more — or possibly even two — but the “hump” will come soon enough. With energy prices gaining 26% annually, the headline number is subject to a lot of volatility. The important factor is that core inflation, excluding food and energy, was unchanged at 2.6% from November.
For the three largest European economies — Germany, France and Italy — there was moderation in the monthly inflation rate, although German CPI was still at an elevated 5.7% annual pace. Spain with 6.7% yearly price gains was also suffering more than most. The most pain was being felt in the Baltic states where fuel inflation bites harder: Estonia saw a 12.2% upsurge from December 2020.
Bank of France Governor François Villeroy de Galhau was pretty sanguine earlier this week that inflation is close to a peak, echoing comments from ECB President Christine Lagarde last month. There will likely be some howls from the handful of hawks on the ECB's governing council. Such is the nature of things. It will be of little immediate relevance.
Though Italian 10-year yields did rise briefly, the impact was fleeting. German bund yields barely flickered, although those are at the highest in nearly three years. The euro was little changed. Nasty inflation is largely priced in.
Grim clenching of teeth is required in Frankfurt. But keep to the course ahead, Captain.
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Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
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