ECB Shocked, Shocked, to Find that Inflation Is Going on in Here, Hikes by 75 Basis Points, after 50-Basis-Point Hike in July

Recklessly late, it hiked a lot faster than forecasters even imagined a few months ago: 125 basis points in two meetings and promising more.

By Wolf Richter for WOLF STREET.

The ECB announced today that it would hike its three policy rates by 75 basis points, bringing its deposit rate from 0% to +0.75%, thereby ending the era of Zero Interest Rate Policy (ZIRP). This is the biggest rate hike since 1998, at the very beginning of the monetary union, when countries still used their local currencies.

At its meeting in July, the ECB had ended its Negative Interest Rate Policy (NIRP) by hiking its policy rates by 50 basis points, its first rate hike since 2011, and the biggest since June 2000. The rate hike brought its deposit rate up from -0.5% to 0.0%. Both those terms – ZIRP and NIRP – have become expressions of central-bank induced financial absurdity.

And the ECB is shocked, shocked, to find that inflation is going on in here, and so there will be more rate hikes “over the next several meetings” because “inflation remains far too high and is likely to stay above target for an extended period,” and the ECB needs “to dampen demand and guard against the risk of a persistent upward shift in inflation expectations.”

Effective September 14, the ECB will hike its:

  • Deposit rate, from 0.0% currently, to 0.75%. RIP ZIRP.
  • Main refinancing rate, from 0.5% currently, to 1.25%
  • Marginal lending rate, from 0.75% currently, to 1.50%.

QE is over.

The ECB confirmed today that QE was over. It’s Asset Purchase Program (APP) and its Pandemic Emergency Purchase Program (PEPP) will maintain their current balances, and replace maturing securities with new securities.

The balances of its “targeted longer-term refinancing operations” (TLTRO III) with banks have dropped as loans have matured. The ECB said that it “will continue to monitor bank funding conditions and ensure that the maturing of operations [under TLTRO III] “does not hamper the smooth transmission of its monetary policy.”

Recklessly late, but moving a lot faster than imagined a few months ago.

QE finally ended. NIRP, the greatest absurdity of all, finally ended. And now ZIRP finally ended. But with overall inflation at 9.1% and the policy rate at 0.75%, the ECB is still throwing lots of fuel on the inflation fire, making it the most reckless of the major central banks.

But it has moved a lot faster – hiking by 125 basis points over two meetings – than people had predicted just a few months ago. Back then, forecasters saw one or two timid hikes of 25 basis points this year, bringing its deposit rate to maybe 0% by the end of 2022. Turns out, its deposit rate may well be over 2% by the end of this year, which seemed like an unimaginably high rate just a few months ago.

Inflation started surging in March 2021 and exploded this year.

Inflation in the Eurozone, similar to inflation in the US, started surging in early 2021, nearly a year before the war in Ukraine. In July 2021, it blew past the ECB’s target. In February 2022, it hit 5.9%. And then it went from there to 9.1% in six months, a record in the Eurozone data going back to 1997.

For most of this time, the ECB vigorously brushed off the inflation. It’s just over the past few months that it gradually started taking inflation seriously.

What is now transpiring in the Eurozone is runaway inflation, with CPI hitting 25.2% in Estonia, and with nine of the 19 Eurozone countries experiencing double-digit inflation. It’s a horror show, despite national governments throwing many billions of euros at all kinds of subsidies and tax holidays that lower energy retail prices, transportation prices, and other items.

ECB acknowledges: Inflation is spreading, including into services.

Inflation is a big theme in the ECB’s statement. “Price pressures have continued to strengthen and broaden across the economy and inflation may rise further in the near term,” it said.

The ECB has “significantly revised up” its inflation projections, despite the tightening of monetary policies and the “substantial slowdown” in economic growth:

  • 2022: 8.1%
  • 2023: 5.5%
  • 2024: 2.3%

Energy prices that started surging across Europe in early 2021 and this year have exploded.

Inflation less energy, food, alcohol, and tobacco products jumped from 2.3% in January to 4.3% in August. And inflation in services jumped from 2.3% in January to 3.8% in August.

Energy prices will eventually come back down by at least by some amount, but inflation in services, which is a big part of the economy, is particularly hard to get back under control.

“Energy is still, of course, the main source of inflation,” ECB president Christine Lagarde said at the press conference, “but we also have an inflation that spreads across a larger range of sectors.”

Glue gun in hand.

“The Transmission Protection Instrument is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries, thus allowing the Governing Council to more effectively deliver on its price stability mandate,” the ECB said in the statement.

This TPI is the glue gun to keep the Eurozone together. Its purpose is to allow the ECB to hike rates and to tighten, while keeping the spread between, say, German government yields and Italian government yields, from blowing out and triggering another sovereign debt crisis.

Under this program, the ECB can target the bonds that it allows to roll off the balance sheet, and the bonds that it buys, based on yields in the fiscally weaker countries. For example, if the spread between German and Italian yields begins to blow out, it can let maturing German bonds roll off its balance sheet while buying a similar amount of Italian bonds.

The hope is that the mere existence of the tool will keep markets in line so that the ECB won’t even need to use the tool all that much.

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  99 comments for “ECB Shocked, Shocked, to Find that Inflation Is Going on in Here, Hikes by 75 Basis Points, after 50-Basis-Point Hike in July

  1. For those who don’t get the reference in the title, it’s from the famous scene in Casablanca

    • Calvin says:

      Omg , that is too funny! And the winnings given at the end… so fitting !

    • 2banana says:

      The usual suspects?

      Greece and Italy?

      • Flea says:

        And Portugal ,Spain . This is nuclear in monetary terms if piigs blow up its lights out for world economy

      • Mark out West says:

        Remember it was the German Banks along with (I think Goldman) that cooked the books for Greece to let them into the EU so they could use Greece to help devalue the Euro and support selling BMW’s to Greece. Then the Germans who insisted Greece sell everything to pay them back :-))

        • Benedict Walmsley says:

          Goldman got its fees, Greece lost all its young to other labour markets, ECB gave Greece more credit as a punishment for not paying their loans!

  2. Bobber says:

    I sometimes wonder if it makes more sense to hold wealth in hard assets or gold instead of the Euro. The EU has been abusing it’s currency for a long time now. Band Aids don’t work in the long run. Time for reckoning.

    • RATE HIKE AWAY says:

      I agree the EU should continue to increase rate hikes to control inflation.
      The EU still has not figured out how to control countries like, Italy, Greece and Portugal, the policy abusers. Healthier countries like Germany, Austria, Sweden, keep bailing them out. Am I mixing apples and oranges?

      • Wisdom Seeker says:

        It takes 2 to do the debt-tango: there can’t be borrowers without lenders. There’s policy abuse on all sides – foolish saving-and-lending going on, as well as foolish borrowing.

        It’s well documented that Germany in particular has structural policies which drive excess saving. A side effect is this needlessly pushes their own workers into reduced standards of living. And then the savings must be lent, which enables (in the addiction sense) many of the other nations to be debtors.

        Instead of getting the best of each nation’s strengths, you get the worst.

        • eg says:

          This is the thesis of Klein and Pettis’ “Trade Wars Are Class Wars” — Germany and China “export” underemployment by artificially lowering labour costs (in Germany see the Hartz Reforms) and as you point out this also has pernicious consequences in debt markets.

      • Einhal says:

        The way to control actors who keep behaving badly is to stop allowing them to do so. If you allow people to behave badly, they will. Countries are no different.

      • Augustus Frost says:

        That’s because there is no solution to the problem. Almost everyone assumes that if a problem exists, there is a solution available, especially one with no negative consequences.

        The solution the EU wants and IMO actually trying to reach as it’s “end game” is a federal state.

        A federated EU will only be a new version of Yugoslavia writ large. Another political entity with no common culture.

        • TonyT says:

          Corrected: the EU elites want a centralized state, not a federal state.

        • unamused says:

          ‘That’s because there is no solution to the problem.’

          All too true. The EU has the same problem the US has: it can’t generate ‘growth’ without generating debt even faster, and yet rates must rise in the attempt to control inflation, which can only squash the increase in debt, which in turn diminishes ‘growth’.

          It’s a conundrum, I tells ya.

          ‘The solution the EU wants and IMO actually trying to reach as it’s “end game” is a federal state.’

          That’s what the bank cartel wants, at any rate, to consolidate profiteering operations, regardless of what the EU wants, which one could as well presume is to please the banks.

          The British bank cartel seems to have shot itself in the foot by brexiting, which could well accelerate its decline into a failed state. Like the US, Britain and the EU have economic, political, and other problems which are likely to prove unmanageable, if not catastrophic.

          I’m personally unaffected, so be that as it may.

          I’m looking forward to the next report on CA residential real estate. It’s presently clear and 111 °F in Sacramento with vanishingly low humidity, and I have predictions needing confirmation.

          All in all, there are indications that civilization has already begun its collapse. That’s a bad thing.

        • VintageVNvet says:

          For una:
          Sacto later hit 116, apparently a new high temp record for any date previously.
          Can we see the data,,, just the basic data from years ago? Then be able to correlate with other actual science?
          Apparently NOT lately.
          Definitely warmer in the general area where WE, in this case the family WE were born and raised,,,
          And the data that is clear enough for this old boy indicates the ”sea level” upon which all or almost all elevation ”datum” is based is up, up to 10 or more inches in the last century or so…
          Just hoping our hood in ”central west FL,” with elevations near and above 45 feet above ”sea level” becomes ”waterfront” and we all know what that means for ”value”,,, eh
          LOL,,, get used to it you young and younger ”boomers” et sequalae…

      • Concerned_guy says:

        Sweden is not part of EUR and does not bail out others. Their primary currency is SEK.

        • Anthony says:

          That’s not strictly true. You have to see if Sweden is a net contributor to the EU and then where that money goes.(usually south)

      • fajensen says:

        Healthier countries like Germany, Austria, Sweden, keep bailing them out.

        Of course they do: They need *someone* to buy their Husqvarna, Ikea, Ericsson, Mercedes, Volkswagen and whatever.

        They would have shown more style and class if they didn’t need to present themselves as “the responsible ones” all the time.

        There’s *plenty* of dysfunction and straight-up corruption in Germany and Sweden!

        As good example as any of “Values being valuable” because it is something one blatantly is rather short on!

        I.O.W.

    • Tim says:

      It doesnt make sense, war in Europe plus inflation/recession concerns everywhere and central banks that have manipulated currencies for years –
      and price of gold has declined?

      • Flea says:

        Deflationary environment central banks raising rates ,= better returns on cash ,letting bubble deflate in hard assets.Because rich only buy at bargain prices .

        • CRV says:

          Dutch banks still don’t pay interest on savings.

        • phleep says:

          When the world is runnin’ down
          You make the best of what’s still around
          — The Police

          The go-to seems to be relatively-less-collapsing-assets. But these markets are so weird, the fog of sentiments and funny money so distorting.

          Here in SoCal, the radical heat is resolving(?) by a tropical storm, wind from unusual directions and supposedly rain squalls. What will clarify things up in markets and simplify them, may be a storm of some concern.

        • historicus says:

          Flea…
          Who has EVER seen deflation?
          Gas prices dropped $1. Deflation or a price rollback from a spike?
          Disinflation maybe.
          CPI numbers will be cheered as the increases will begin to temper, but unnoticed will be the fact the smaller increases will still be stacked upon the price run ups of last year.

      • Escierto says:

        No central bank wants gold as a viable alternative to the fiat toilet paper they peddle. The bullion banks manipulate the gold market by selling paper gold to push the price down. Eventually the fractional reserve system which has been created in gold is going to end when enough buyers demand delivery. There are signs that we are in the early stages of such a collapse.

        • phleep says:

          What’cha gonna do at the gas station, weigh out a micro-sliver of gold while juggling your personal defense system to ward off the hordes of robbers? Oh, there’s a “secure” app for that, like what, the recent crypto wonders?

          How will the masses front run the rich (not to mention tehmasses of sentimental-crazy punters already in the stuff) to get enough of the gold to make this function and not just be a wealth transfer? All NOT going to work.

      • fajensen says:

        When one gets margin called, the good assets are liquidated first.

  3. Greatvampire says:

    I don’t know why the central banks think they can easily stop the runway train that is inflation. This has been waiting in the wings for several years now. Business evidently doesn’t like low inflation. There was a suppressed tendency on the part of the private sector to want to expand its prices, and adjust for real-world circumstances. Yet, the governments continued to suppress, suppress, suppress. Perhaps in the future the government and the business sector will see fit to work more hand-in-glove than has been the case up to now.

    • Wisdom Seeker says:

      Re “I don’t know why the central banks think they can easily stop the runway train that is inflation.”

      Don’t tempt them… They could stop the inflation cold by cutting the money supply in half overnight. They’ve just chosen not to because of the undesirable side effects. If the pressure builds up to Just Do Something, though, watch out!

      My personal suspicion is that they’ll have to accelerate QT, but they’ll mask that (to keep markets from freaking out) with extra theatrics around rates.

    • unamused says:

      “I don’t know why the central banks think they can easily stop the runway train that is inflation.”

      I’m not persuaded that they think they can, and certainly not without severe economic consquences. Wealthy Europeans may well have to allow themselves to be taxed, just to save their bacon. So to speak.

      • phleep says:

        If money doesn’t work, it loses its “moneyness,” there will be a mass move to other things as “money.” The technology exists now (not quite ready for prime time but, some iteration of Web3) , though the collision with the regulatory system (and street life) would be epically weird.

        • LK says:

          Web3 – the financialization of everything — no thanks.

          Only beneficiaries of Web3 are going to be those who architect it, just like with crypto. Get them on your platform, get them dependent on your platform, then squeeze.

          The solution of the loss of trust in institutions and things we’ve taken for granted is not going to come from private sector actors claiming disruption and innovation to a brightest future to hide how they want your money for themselves. Technology is no bulwark against societal decay, just changing who has power in the equation, good or bad. And with people like Zuck “leading,” I’d bet everything on bad.

  4. Poor like you says:

    Two questions:

    1.) Do you think the predicted energy shortages this fall and winter would mean energy price inflation? I have a very limited understanding, but it seems like low supply would mean higher prices.

    and 2.) is there a tipping point where the TPI can’t cope with oscillations in the EU bond markets?

    • Wolf Richter says:

      Energy prices have already spiked. That already happened. In the US, they’ve already come down. Price spikes like these tend to unwind quite sharply. And occasionally, we’ll get the spectacle of a hedge fund blowing up in the process.

      • GringoGreg says:

        Within 2 years oil will be $150 to $200 a barrel. All the cheap, accessible oil is in rapid decline–like Ghawar dropping from 8 million barrels per day to 3 million per day with copious amounts of seawater pumped in to get the last dregs from the reservoir. All that’s left is the expensive dregs, fracking, tar sands. Gasoline will have twin problems of expensive oil and expensive refining.

        • Escierto says:

          Demand for gasoline is diminishing every day. Why do you think the oil companies refuse to build any more refineries and in fact are gradually eliminating the ones they have?

      • GringoGreg says:

        Burning through over 36 billion barrels of oil a year and moving higher. Twilight in the desert and Twilight on the world’s easily recovered oil reserves. The oil dip is a knee jerk reaction to a coming recession, but the fundamentals say oil will be moving much higher!

        • Wolf Richter says:

          GringoGreg,

          US frackers spent 10 years losing hundreds of billions of dollars. A couple of hundred filed for bankruptcy, including some bigger ones. Now they’re finally making money. And they’re desperately hoping to keep it that way, and they need higher prices to keep it that way.

          But there is nothing that will prevent them from returning to their old business model of cranking up production amid declining demand, causing the price to collapse, while losing tons of money and filing for bankruptcy, as we’ve seen with great astonishment between 2015 and 2020.

          There is now a “new discipline,” as it’s called, and that might work to keep production under control. But it may not. US frackers are a wild and wily bunch.

        • GringoGreg says:

          Fracking wells deplete rapidly that is why it is so expensive. Frackers need ever higher prices to maintain any profitability as all the sweet spots in america are well past peak oil! Fracking dregs will be pretty much finished within 10 to 15 years and then what? America goes back to a very big oil importer and oil will be circa $200! World oil demand continues to rise!

    • Augustus Frost says:

      “2.) is there a tipping point where the TPI can’t cope with oscillations in the EU bond markets?”

      Yes, though I can’t tell you in advance when or what will be the attributed cause.

      There are only two options for the EU longer term. 1) A federated state, of some sort. 2) The “European Project” blows up.

      My prediction is a federated state with a subset of current EU membership. Germany, France, Austria, the BENELUX countries, one or more of the Nordic countries, and maybe a few others I do not expect now. I don’t think it will include Portugal, Spain, Italy, or Greece.

      • dang says:

        Or, like the end of the little league season, the individual countries that comprise the EU decide to dissolve the whole experiment of the Euro and resurrect their individual currencies and reinstall the common market.

        It’s pretty obvious the Euro is a currency designed to be gamed.

        • dang says:

          The problem with Europe is that they are still fighting the slight that occurred from yesterday until a few thousand years ago.

          The founders, infidels just 250 years ago, codified the common knowledge, do not become entrenched in the European wars.

          My goodness, England is mourning the passing of a queen, who oversaw the exploitation of most of the worlds population that bleeding hearts are still trying to establish legitimacy, in 2022.

        • dang says:

          The point is that the bubbles will burst when they burst. Time will pass, wasted on wondering when the next great depression begins, while others reap the magic of today (I’m giving myself a pep talk here).

          The American stock market, too me, looks overvalued by 50% or so. But I have been wrong for so long that my kids roll their eyes when I segue the conversation into my financial predictions.

        • phleep says:

          Like everything, life stumbles forward in little awkward feeling moves. As with earthquakes or market moves, there are thousands of micro moves all the time. Then (seemingly out of nowhere, many will be head-scratchingly heard to say) comes that occasional full face-plant pratfall. And then comes a serious reset. I like to be far from the epicenters. But on this planet, there is no “away,” or “outside” any more, because the geniuses wired everything to everything.

  5. Rosarito Dave says:

    Wolf, can you talk about what you think the short and longer term effects that EU’s and UK’s price caps that consumers will be paying for energy this winter? It seems like another bailout not just for households, but for the energy companies themselves, especially in the UK by monetizing debt to pay energy trading margin calls to keep liquidity in the market…

    What could possibly go wrong! lol :-)

    • phleep says:

      As in 2008, the central network managers rewire the juice and redistribute it. They re-papered the world’s finance network then, as they will (try to do with) this one. Just issue new paper. They have the printers to do that. It needn’t even be called a “tax.”

    • George Cloonotney says:

      Truss’s Energy Cap works out to a max energy bill of about £208 per month (for the average user of 1800 kWh electricity and 12000 kWh gas per annum), with the excess above that being passed to the tax-payer.

      If you can afford £208 per month…

      Who can spot the perverse incentive here…

      • George Cloonotney says:

        small correction – the average user is assumed to use 2900 kWh electricity per annum

  6. TimmyOToole says:

    Thanks, Wolf! What I’m wondering is how much of their inflation is due to supply reduction of Russian oil vs bad monetary policy? As can raising rates and QT help with the former? Thanks

    • Wolf Richter says:

      I gave you part of the answer in the article. Inflation started surging in March 2021. In February 2022, before the supply disruptions, inflation hit 5.9%.

      Quoted from the article:

      “Inflation in the Eurozone, similar to inflation in the US, started surging in early 2021, nearly a year before the war in Ukraine. In July 2021, it blew past the ECB’s target. In February 2022, it hit 5.9%. And then it went from there to 9.1% in six months, a record in the Eurozone data going back to 1997.”

  7. Xavier Caveat says:

    Has there ever been a time when the entire world was in inflation lockstep?

  8. Otishertz says:

    “TPI is the glue gun to keep the Eurozone together. Its purpose is to allow the ECB to hike rates and to tighten, while keeping the spread between, say, German government yields and Italian government yields, from blowing out and triggering another sovereign debt crisis.”

    This TPI creates a new moral hazard where less responsible countries can expect the ECB to moderate rising rates on their excessive debt creation and perpetuate yet more systemic mispricing of risk. It rewards irresponsible behavior by design. Hopes that its mere existence will obviate the need for its implementation will be dashed.

    It will be yet another novel justification for profligate spending policies of EU politicians who feel the need to always “do something” to “help” solve the problems brought in by state and central bank policies that are out of touch with reality and only serve corporations and the wealthy.

    The are only helping themselves.

    • Degobah Smith says:

      Put another way… the kid living in your garage is never gonna get a job and move out if you keep paying his car payment and buying him weed. Just sayin’.

      • phleep says:

        Everybody likes the film festivals and seaside restaurants. Nobody pays taxes there anyway. Even your money can get laundered nicely while you pose on the bow of the yacht.

  9. Mark Stoneweapon says:

    In July 2022, there was a large decrease in the U.S. trade deficit with the EU. The deficit was even lower than July 2020 during lock downs. This may be the beginning of a significant trend where Europe’s trade surplus with the U.S. dissolves.

    • dang says:

      Maybe, but I doubt it. One of the negative aspects of maintaining the status of the reserve currency is the unofficial responsibility to run a trade deficit. Ancient merchantilists, like Germany and China and Korea and Japan, etc, take advantage of America maintaining her reserve currency status’

      • dang says:

        Funny story about my relatives and the true evaluation of the noble mankind. True story.

        One of my relatives worked his ass off, earning master degrees in engineering and business administration.

        The other relative, related by marriage, unrelated by DNA was an American veteran from 1971 who’s favorite perch was a bar stool at the local VFW.

        Well, it turns out that mister goody two shoes had zero grandchildren and the veteran had impregnated a girl while he was a soldier, who’s daughter had nine children.

        Not sure how to score that one on a Darwinian scale except to suggest that the goody two shoes should try to pass along any knowledge he may have to the beautiful ruffians that own tomorrow.

      • Mark Stoneweapon says:

        I know the Marshall plan was to build a strong Europe during the cold war to counter the USSR, but the Fed has to defend the dollar now. Neocolonialism, financialization and globalization have reached its limit. US foreign policy is changing. Interesting times. . . .

      • David says:

        It is not clear US will stay reserve currency, China does more world trading these days and US with 30 trillion debt and extreme currency creation is sabotaging own currency, risking run away inflation/devaluation of currency. If US raises interest rates/bond rates and quits making USD out of thin air then the debt grows out of control like Greece 2008, if US keeps making money then currency becomes worthless like venezuela.

  10. ru82 says:

    Hey Wolf. A friend was telling me about a spike in car repos. Any latest news in this area?

    A local jeep dealership that had 2 or 3 new jeeps in inventory on its lot for the last year ( i drive by the place often) now had at least brand new 20 jeeps , 10 to 15 grand cherokees and 10 of those truck looking jeeps all show up in the past two weeks. The lot went from almost empty to 60% full.

    It’s sister lot next door which is a Ram dealer has plenty of trucks too.

    • Depth Charge says:

      Fake news. There is no repo spike and there are no full dealer lots. In fact, the CEO of Intel just came out and expect the auto chip shortage to last into 2024.

      • Depth Charge says:

        Further, every article I read about the auto chip shortage has this in it:

        “Automotive manufacturers cut back on semiconductor orders severely at the beginning of the COVID-19 pandemic in early 2020. The auto companies were fearful of being stuck with excess inventories of cars if demand fell significantly due to the pandemic. When the automakers tried to increase orders, they had lost their place in line and were behind other industries such as PCs and smartphones.”

        These guys tried to screw the chip manufacturers, and in turn screwed themselves bigly. Self-inflicted. Now they lose trillions because they can’t make cars. Couldn’t happen to a more deserving lot of scumbags.

        • TonyT says:

          B.S. on “lost their place in line to PC’s” – automotive chips don’t compete for fab space with PC parts (CPU, GPU, DRAM, flash) or smartphone parts (SOC, DRAM, flash). Automotive chips such as MCUs, motor drivers, and power electronics use much older tech, and a much higher percentage are made in house.

        • Depth Charge says:

          “B.S. on “lost their place in line to PC’s””

          Tell that to the entire industry that’s reporting it.

        • Wolf Richter says:

          Depth Charge,

          TonyT is right. I’ve been pointing this out for months (a year?) as well. What automakers have been short — and they’re all saying the same thing, it’s not a secret — are cheap trailing-edge micro-controllers that go into door locks, rear-view mirrors, sensors, etc.

        • drg1234 says:

          Tony T:

          That’s not entirely true anymore.

          It’s true that the big automotive players (Bosch, Infineon) have their own fabs. But they, like everyone else, offloaded a lot of their work to Taiwan Semi. Fabs are expensive, and using TSM for part of the demand is much cheaper than building out 100% of your own fab need.

          When demand cratered during the early COVID, TSM took the opportunity to upgrade some of their older processes to newer ones, because the newer processes yield more finished chips per square meter of fab space (the wafers are larger while the processing machinery is roughly the same size).

          That is why you have the CEO of TSM telling the automakers that they need to redesign their old chips for newer process nodes. It’s not about losing their place in line; the capacity is gone.

          You’ll note that Tesla hasn’t really been affected by the chip shortage; their silicon is all relatively new, and there is spare capacity for those newer processes. Tesla’s volume is a rounding error in those processes.

          That is why the chip shortage for cars has been so persistent.

          (My lab uses a custom piece of silicon and this is what I’m hearing from the people I work with in the industry.)

        • unamused says:

          TonyT: “Automotive chips such as MCUs, motor drivers, and power electronics use much older tech, and a much higher percentage are made in house.”

          True, but it’s the newer tech, the bells and whistles, that’s holding them up, so what DC is saying also appears to be true: the automakers guessed wrong and bleeped themselves, all prefaced on optimized and therefore brittle supply chains.

          Jacking up prices has saved them for the present, but that isn’t going to last because the practice can be expected to generate demand destruction, particularly since consumers are going to get squeezed by inflation, sooner or later.

          Nuts, isn’t it?

        • Depth Charge says:

          Wolf – I pulled that direct quote from yet another article I was just reading. The narrative is coming from somewhere.

        • Wolf Richter says:

          That narrative has been regurgitated over and over again for well over a year, and will continue to be, by bloggers who don’t know anything about the auto industry.

    • Wolf Richter says:

      ru82,

      Your friend is spouting off BS. Your friend read a clickbait headline in Barron’s that I personally and publicly shot down and crushed:
      https://wolfstreet.com/2022/08/02/auto-loan-delinquencies-and-repos-are-not-exploding-they-rose-from-record-lows-and-are-still-historically-low/

      However, you sister is correct. Ram dealers are overstocked. Other Stellantis brands (such as Jeep) may now have plenty of inventory. But new vehicle dealers are out of fuel-efficient vehicles:

      https://wolfstreet.com/2022/08/13/new-vehicle-inventory-dips-near-record-low-fuel-efficient-cars-vanish-but-supply-of-full-size-pickups-suvs-rises-discounting-sets-in-to-move-the-iron/

      It would help if you actually read my articles.

      • ru82 says:

        I did read that article. This jeep dealership was empty a month ago.

        The lot has been empty for the past two years. I drive by it daily. Suddenly 2 weeks ago it started filling up. I went online. so from none to 221 is a big change

        156 gas vehicles
        21 Hybrid
        8 PHEV

        I can send you a picture depth charge. not fake new

  11. Evan says:

    Nice graphs, as always. If you had asked me how long the ECB maintained negative interest rates, I might have said – “Huh? Well, shucks…that’s unpossible for more than a few months, at most!” Yet, look at that graph. It certainly helps explain a lot of what is going on with current inflation trends.

    • Mark Stoneweapon says:

      The license for QE relied on cheap exports coming from Russia and China. The EU’s large trade surplus with the U.S. and the lion’s share of tourism receipt’s made negative rates possible.

  12. Michael says:

    “Guess I picked the wrong day to stop sniffing glue.”

    • unamused says:

      Some mornings it’s just not worth it to chew through the leather straps.

  13. Thomas says:

    Inflation is currently around 20% in the U.K. and I guess it will be about the same in the EU or worse given the natural gas pipeline issue?

  14. Tim says:

    Wolf, Am I missing something?
    I dont see any reaction in the metals markets, I am accustomed to seeing gold prices spike in this environment – thats the real shock to me

  15. Debt Free State of Mine says:

    Controlled Chaos from across the pond, they have no idea what comes next. The sky is falling. Where is chicken little when you need him. Boris got out JIT. Wall St fighting the shorts to stay above S&P 500 3900 level. 🇺🇸Sept 13 CPI data cannot come soon enough. Feds have to keep sharpening the knife for Sept 21. Never waste a good crisis they say. Billions have been made, trillions have been printed. Fear and Greed now take center stage. Seems as if No one wants to go home after the dance. Feds calling in the Bear to fight inflation, Wall St knows there is a bunch of cash on the sideline. It’s really like cutting your throat to blow your nose.

    • rojogrande says:

      It’s worth pointing out there is no cash on the sideline in an aggregate sense. For every dollar that is used to purchase a share of stock (except at the IPO or during a subsequent share issuance by a corporation), a dollar leaves the market and goes to the seller of the stock. Thus, Wall St can always claim there is enormous cash on the sideline because cash never leaves the sideline. Individually, you can deploy your cash by purchasing stock and thereby help someone else exit the market. I assume people on Wall St know this, but use the cash on the sideline gambit to get retail investors to grab falling knives.

      • James says:

        The stock market is not a zero sum game like forex. In the stock market wealth is created and destroyed by rising and falling prices.

        So one person entering for a dollar may be cashing out the position of somebody who entered that trade for 10 cents. Then that same person might exit later for 25 cents, taking a 75 cent loss on the trade. That lost money was destroyed.

        • Einhal says:

          James, that’s completely false. In your hypothetical, the person who entered for a dollar paid a dollar to the seller. So the cash with respect to that transaction is still a dollar, but now the seller of that share has it.

          If the buyer exits at 25 cents, someone else has paid him 25 cents of his cash, but the 75 cents hasn’t been “destroyed.” It’s just in the hands of the original seller (assuming he didn’t buy something else with it)

      • Otishertz says:

        What about the $5.5 trillion in excess reserves and reverse repos at the Fed? That’s a lot of money on the sidelines and deliberately keeping it there is dictating many Fed policies because setting it loose would only make asset price inflation much worse.

  16. Bobber says:

    Central banks are trying to perform brain surgery in the dark. The problem is, they can’t do it with the lights on either.

    They don’t know what caused the inflation, and even if they did, they wouldn’t have the integrity to admit it, so why do we expect them to resolve the inflation problem with acceptable results?

    The economic fires will persist until all matches away from the children.

    • Flea says:

      If central bankers look in the mirror inflation problem will show up,I crack myself up hahahahaha

  17. LordSunbeamTheThird says:

    In fact TPI is currently a “whatever it takes” type market threat, its not active. There is apparently a large short against Italian debt and the ECB needs to threaten the shorters down.

    Whether there will be a bailout for Italy, a bail-in, the whole thing looks like a disaster and for how much long can the pretense continue should be the question on people’s minds.

    Its a shame that instead of the market being allowed to express to Italy that the debts were getting unaffordable when yields would have been going up while the debt was manageable, the ECB has essentially falsified the price of debt to allow the Italians to ruin themselves.

    • Gattopardo says:

      Nothing a sovereign default won’t fix.

    • rick m says:

      The capacity for Italians to ruin themselves predates the ECB, the EU, and the Common Market by many decades. Brussels just tuned them up. Love Italy, but that’s a fact.

      • phleep says:

        So odd to see Brussels still running after Italy waving a rescue package, as Italy runs whither it will. But they woke up wedded, welded. They had such a nice honeymoon, such nice palazzos and shoes though! Nice uniforms under il Duce.

  18. RockHard says:

    I was just reading another article that mentioned how Uber shut down their software development office in Latvia. “Eight years after opening the engineering hub, Uber is shutting down this location. The official reason? The difficulty of hiring, local senior leadership.”

    Which seems weird. But then I read this and thought that with inflation pushing 20%, maybe the local staff is begging or demanding pay raises to keep up with cost of living. No idea if that’s true, but now I’m really curious.

  19. dang says:

    Your presentation of the beleaguered Euro-zone was informative.

    Not a hint of ” hold onto your wallet when the drama of Europe, the quintessential queen of drama” decides to spasm. Two times in the last 100 years, America has been dragged into the quagmire of the ancient European, clan based, cultures.

    They are having one of their spasms about which country owns something or other. I’m not sure which formerly owned country, by a royal grifter family, is the motivation for the war in the East.

    The European energy market is an example of what is wrong with the open ended pricing power of the futures and derivative, so called, markets.

    The monetary resources available to the speculative community is sufficient to impose an onerous tax on everyday people. In this case, the cost of energy, where the market speculators have been allowed to extort the people.

    The only free part of this market is the buyer. The seller is a monopolist who has captured government.

    • dang says:

      I’ve been considering the effect of being hit in the head over 3000 times in my youthful years playing American football through high school and college as well as boxing during the same period. Maybe my brains have been scrambled which makes the reality seem insane. Versus the alternate interpretation that reality is indeed, nutz, capable of defending zirp.

      • dang says:

        ZIRP, zero interest rate policy. Who is nutz ?

        I graciously offer an olive branch to the poor economic PHd’s that convinced themselves that ZIRP was rational.

        As it falls apart, is undone as a mistake, and the carnage of the miscalculation, inflation, ravages the little people, they absolve each other. Who could have known that interest rate suppression would result in uncontrolled inflation.

    • Cytotoxic says:

      The time bomb to go off this time is Italy, and I think it might be curtains for the EU as we know it. The Greece debacle was enough to convince Britain to leave. The Italy Inferno will (further) vindicate that move.

  20. Finster says:

    No question the ECB has been reckless for years, “doing whatever it takes” to trash the euro in order to “save” it. Insanity.

    Now its ‘strong medicine’ amounts to trying to stop a charging rhinoceros with a pea shooter.

  21. Cytotoxic says:

    Oh man, Wolf must be loving the headlines right now. ING claims a pivot to a rate cut will happen in 2023, prices of every asset from oil to BTC bounces. Classic.

    • Wolf Richter says:

      Wasn’t ING in the camp of those last year that said that the Fed would never and could never raise rates more than 25 basis points, one and done?

      • Jon says:

        I see no reason with inflation this high how can FED pivot.

        Its all about inflation now.

  22. michel says:

    It’s the glue gun…. stupid

    Frankly you don’t understand the politics at all here.

    It’s exactly the same thing as with the debt crisis. They were supposed to have no bail outs. It was… anticonstitutional. They waited until they were at the edge of the euro collapsing. They all shit them selves… and violated the counstitution while pretending they didn’t. What ever it takes draghi included violating the counstitution.

    The glue gun is the same thing here. They waited until everybody got totally scared from financial armagedon… and then violated the constitution with the glue gun. And no one will dare say anything. This time it’s what ever it takes lagarde.

    This is the REAL reason why they seam to be doing such an abrupt U turn. If you had understood this, you would have seen the 75 coming. You should stop underestimating the ECB.

    and yes, i RTFA.

    • Wolf Richter says:

      “It was… anticonstitutional. …and violated the counstitution”

      Hahahaha, hilarious BS: the EU precisely does NOT HAVE a constitution. It is founded on treatises. The Treaty that was supposed to establish a constitution was never ratified because the French people rejected the constitution by a huge margin (55% to 45%) and the Dutch people rejected the constitution by a gigantic margin (61% to 39%). That was the end of it. Are you too young to remember? You cannot violate that which does not exist.

      But yes, with this glue gun the ECB is trying to avoid another euro debt crisis, as I pointed out in the article. That’s the kind of stuff you get into when you have a common currency but not a common fiscal authority (which the constitution would have made possible). Ignorance is bliss, no?

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