These nasty surprises just keep coming when inflation is broadly entrenched in the economy.
By Wolf Richter for WOLF STREET.
In the 20 countries that now use the euro, the annual rate of inflation in services rose to 5.2% in April, another record in the data going back to 1997, according to the preliminary data released by Eurostat today. Another nasty surprise, another sign that inflation has now shifted deeply into the economy in a fundamental way, despite sharp price drops of energy goods and some durable goods.
Services inflation is the biggie. The majority of what consumer spend their money on goes to services. They include healthcare, education, housing, insurance, telecommunications, streaming, subscriptions, air fares and lodging, restaurant meals, repairs, cleaning, financial and legal services, haircuts, etc.
Inflation is difficult to control once it reaches services. This is made worse because a number of these services are essentials that consumers cannot dodge or substitute or go without.
The biggest cost component for many services are wages, which have been increasing in the Eurozone. Service providers are now able to pass these increased costs to consumers via higher prices, and in this manner feed into services inflation.
The “core” Consumer Price Index without energy – excludes energy products, such as gasoline, diesel, electricity, natural gas piped to the home, heating oil, etc. – at 7.5%, was a tad off its monstrous record in the prior month (7.9%), and was still nearly four times as high as the ECB’s target of 2%.
This “core” CPI without energy and the services CPI have been invoked repeatedly by ECB President Christine Lagarde and ECB governors as reason for continued rate hikes. The wage component of services inflation has reached a point where Lagarde has gingerly mentioned the connection as a worrisome trend.
The overall CPI rate re-accelerated to 7.0% in April compared to a year ago (from 6.9% in March). On a monthly basis, the overall CPI surged 0.7% in April from March, another nasty surprise.
The plunge in energy prices last year and early this year, that pushed down the overall CPI, seems to have largely bottomed out. Food inflation slowed to a still red-hot 13.6% (from 15.5% in the prior month).
Overall CPI Inflation in the Eurozone began surging in early 2021, a year before Russia’s invasion of Ukraine. In October 2021, months before Russia’s invasion of Ukraine, the Eurozone inflation rate surpassed prior records.
This came after years of reckless money printing and interest-rate repression – the Eurozone was part of the negative-interest-rate-policy absurdity. All this was amplified during the pandemic by large-scale government deficit spending directly into the consumer economy. And voilà.
The sharp drop in the overall CPI from the peak of 10.6% in October was driven mostly by the collapse in energy prices that now seems to have bottomed out:
Oh-là-là, the ECB meeting. On May 4, Lagarde will emerge from the ECB policy meeting and ruminate about services inflation that just keeps getting worse, and she’ll grumble about core inflation being “very high,” and that it doesn’t seem to be coming down, and she’ll have lots of reasons to be hawkish.
Her hawkish enthusiasm will be damped by the potential banking issues and tightening credit conditions due to these banking issues, and the hopes that these issues will take some of the burden off the ECB, and that rates might not have to rise as high as they would otherwise to get this inflation under control.
Inflation by Eurozone country.
|CPI by Eurozone Country, Apr. 2022|
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