EU Inflation Continues Rise
Inflation in two of the largest economies in the euro zone, France and Spain, rose unexpectedly in February, according to data released on Tuesday. In France, inflation increased to 7.2% from 7.0%, beating forecasts for 7.0%, while in Spain, it jumped to 6.1% from 5.9%, exceeding the 5.5% predicted in a Reuters survey. The figures have challenged the narrative that a rapid easing in price growth is underway and pushed up expectations for a rate hike by the European Central Bank (ECB). The ECB had previously planned to raise its key rate by 50 basis points in March to 3%, but some policymakers have called for more cautious steps thereafter as past rate hikes are now taking hold, and the economy is starting to respond.
The unexpected rise in inflation has led to doubts that the euro zone’s combined figure, due on Thursday, will show a fall to 8.2% from 8.6%. Economists say that the German number, due on Wednesday, will be more crucial than Tuesday’s releases. Markets are now fully pricing in another 150 basis points of rate hikes by the end of the year, taking the peak in the ECB’s deposit rate to 4%, reflecting the view that it will take longer for the ECB to get price growth back to its 2% target.
The unexpected rise in inflation has also led to concerns that inflation will be more persistent than expected, particularly for core goods that exclude volatile fuel and food prices. Some investors even think there is a risk of the ECB raising rates by more than 50 basis points in March, despite its explicit guidance for the move.
The rise in inflation in France and Spain has given further arguments to the ECB to continue to raise rates beyond the first quarter. ING economist Charlotte de Montpellier said, “Given how underlying global inflation will probably continue to go up in the coming months, that will give further arguments to the European Central Bank to continue to raise rates beyond the first quarter.”
Spain Inflation Surges on Housing
Inflation in Spain has been driven by a combination of factors, including higher energy prices, supply chain disruptions, and the recovery of the economy after the COVID-19 pandemic. The surge in housing prices is partly due to the strong demand for housing from both domestic and international buyers, low mortgage rates, and limited supply. In coastal areas along the Mediterranean has seen a massive increase in the number of Ukrainian refugees in these areas of Spain, acting as a significant driver of inflation in the country, and hammering the availability of housing units. While almost every other country in Europe is seeing a rampant slowdown in housing sales and prices, Spain is experiencing the inverse as a catalyst of the war.