Dilemma for ECB as Energy Prices Fall, Core Inflation Holds Strong

EU CPI flash (May) – 01/06

The fall in energy prices over the last few months has seen headline inflation across Europe decline quite sharply in recent months. Having hit a peak of 10.7% back in October the headline number fell back to 6.9% in March only to tick higher in April to 7%.

 

 

Core prices have proved to be somewhat sticker, these hit a record high of 5.7% in March and only slipped back to 5.6% in April. This presents a problem for the European Central Bank with growing splits on the governing council as to how many more rate hikes are coming over the next few months.

 

The chatter from central bank officials has been very hawkish of late, with talk of more 50bps rate hikes, however few believe the ECB will be able to continue to hike if the Federal Reserve starts its rate pause in June.

 

This week's flash May CPI could well make the ECB's life more difficult if prices start to tick higher again and raise the prospect that rates may have to either go higher or stay at current levels for much longer. Expectations are for another fall in the annual rate to 6.4%, however core prices don't appear to be going anywhere with a modest tick down to 5.5% expected.

 

By Michael Hewson (Chief Market Analyst at CMC Markets UK)