Euro-Area Inflation Rate Hits 2% for First Time Since 2018

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Inflation in the euro area climbed to the highest level in more than two years after economies across the region started to lift coronavirus restrictions and rebounding demand aggravated supply bottlenecks.

Consumer prices rose an annual 2% in May, more than economists predicted, with energy the biggest gainer from a year ago when the region was in full lockdown. Germany, Spain and Italy -- three of the four largest euro-zone economies -- all reported increases.

Euro-Area Inflation Rate Hits 2% for First Time Since 2018

Europe is starting to turn the page on the pandemic. Falling infection rates are allowing shops, restaurants and cultural venues to reopen, and travel is gradually resuming.

At the same time, manufacturing -- which held up well during the most recent round of restrictions -- is increasingly running into supply-chain disruptions. Delivery delays for raw materials and components are constraining output growth, leaving companies unable to meet rising demand, according to a survey by IHS Markit.

While purchasing activity rose at the fastest pace in nearly a quarter century of data, manufacturers also ran down inventories of finished goods to the sharpest degree recorded since November 2009.

Factories lifted their prices by the most in more than 18 years of survey data as they took advantage of the tight market to pass on higher costs to customers.

The European Central Bank has stressed that price increases will likely be transitory, and that it’s still premature to talk about an unwinding of monetary support. While inflation is now at the level policy makers aim to achieve over the medium term, much of the rise can be explained by temporary factors or energy. The institution presents updated economic projections on June 10.

Core inflation, a less volatile measure that excludes volatile items such as food or fuels, was just 0.9% in May.

The OECD made a similar argument this week, saying inflation will accelerate in coming months, boosted by higher operating costs and reduced competition as a result of bankruptcies, but those pressures should fade by the end of the year. Still, it sees “upside risks” in the longer term as the recovery proceeds.

The labor market has already started to show signs of improvement. Euro-area unemployment unexpectedly dropped to 8% in April, Eurostat said.

At the same time, German companies made less use of the furlough program that helped millions of workers hang on to their jobs during the pandemic. According to a separate report, joblessness in the country continued to decline in May.

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