Euro-Zone Inflation Hits Record as ECB Hawks Push Jumbo Hike

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Euro-area inflation accelerated to another all-time high, strengthening the case for the European Central Bank to consider a jumbo interest-rate hike when it meets next week.

Consumer prices in the 19-nation currency bloc jumped 9.1% from a year ago in August, beating the 9% median estimate in a Bloomberg survey of economists, led by energy and food.

Stripping out those drivers, a gauge of underlying inflation inched up to a fresh high of 4.3%, highlighting how price pressures continue to become more broad-based.

The question now is whether the data are enough to nudge the ECB toward the 75 basis-point rate increase that some on its 25-strong Governing Council want debated. It’s an increment that’s been deployed twice already by the Federal Reserve, though dovish ECB officials caution against following suit as Europe braces for a recession.

The quickest price gains since the euro was introduced more than two decades ago leave policy makers in Frankfurt seeking a delicate balance: Rates must be raised sufficiently to steer inflation back toward their 2% target, but not so much that it chokes off whatever economic momentum remains amid fears of a Russian energy cutoff this winter.

Tuesday’s numbers may receive extra scrutiny after officials including Executive Board member Isabel Schnabel said the ECB should focus more on inflation outcomes than projections as the war in Ukraine complicates forecasting.

What Bloomberg Economics Says

“Following Schnabel’s hawkish speech and amid calls for outsized rate hikes from other Governing Council members, the upside surprise in August inflation adds to the possibility for a 75 basis point rate hike as soon as next week’s meeting.”

–Maeva Cousin, senior euro-area economist. Click here for full comment

But while Russia’s invasion is certainly behind the the spike in energy prices, Dutch central bank chief Klaas Knot said Tuesday that strong consumer demand after lockdowns ended has also pushed prices higher. Rising wages and a weak euro represent upside risks, he warned, urging a “swift” normalization of monetary policy.

“There’s an urgent need for the Governing Council to act decisively at its next meeting to combat inflation,” Bundesbank chief Joachim Nagel said after Wednesday’s numbers. “We need a strong rise in interest rates in September. And further interest rate steps are to be expected in the following months.”

Six Governing Council members have said publicly that they think a rate move of more than 50 basis points should be discussed, with money markets putting the probability of 75 basis points at more than 60%. Following Wednesday’s data, investors maintained bets on 166 basis points of tightening by year-end.

Other officials have called for more restraint. Chief Economist Philip Lane this week urged a “steady pace” of rate hikes to minimize the risk of disruptions, while Executive Board member Fabio Panetta said a weaker economy would help temper inflation.

Economists increasingly predict a euro-area recession in the coming quarters as the rising cost of living saps demand, undermining the pandemic rebound. The ECB will shed some light on the outlook with a new set of forecasts at its Sept. 7-8 meeting.

Governments have been trying to offset the energy-price shock through a myriad of measures including tax cuts, direct payouts to households and subsidies for companies. All told, they’ve spent about 280 billion euros ($279 billion), according to the Bruegel think-tank in Brussels.

More help may be coming: The European Commission said this week that it’s also planning to take urgent steps to address skyrocketing power prices. While that sent market prices tumbling, Russia halted gas flows through a key pipeline on Wednesday for temporary maintenance.

(Updates with Bundesbank head in eighth paragraph.)