Euro-Zone Inflation Unexpectedly Rises as Iran Risks Swirl
Euro-area inflation unexpectedly quickened, backing the European Central Bank’s caution on interest rates, particularly as the war in Iran sends energy prices surging.
Consumer prices rose 1.9% from a year ago in February — up from 1.7% in January and just below the ECB’s 2% target. Analysts surveyed by Bloomberg had anticipated an unchanged reading.
Core inflation, excluding volatile food and energy costs, also surprised economists by accelerating to 2.4%. The closely watched services gauge rose to 3.4%, Eurostat said Tuesday.
ECB policymakers are currently content to keep borrowing costs at 2%, confident that inflation will return to their goal and that the region’s 21-nation economy can sustain moderate expansion. But the Middle East fighting is adding to risks that already included US tariffs, a stronger euro and a possible flood of cheap Chinese imports.
Traders now see a 50% chance that the ECB will hike rates by a quarter-point this year.
As the military action in and around Iran roils oil and gas markets — a factor that could feed inflation — the ECB “will be closely monitoring developments,” Chief Economist Philip Lane told the Financial Times in an interview published Tuesday.
He cited a prior scenario gamed out by the central bank showing “a substantial spike in energy-driven inflation and a sharp drop in output” caused by disruption to energy supplies stemming from a Middle East war.
European gas prices are already up more than 70% since Friday’s close after Qatar halted production at the world’s largest export facility due to Iranian attacks. Global benchmark Brent rose above $80 a barrel, after spiking about 7% on Monday.
How long the conflict lasts will determine the ferocity of the inflation hit in Europe. While economic expansion would also suffer from a prolonged bout of higher energy prices, an “oil shock” would probably be inflationary on a net basis, Belgian central-bank Governor Pierre Wunsch said Monday.
“We don’t know much so I would certainly not rush to react to any movements to energy prices,” Wunsch said. “If it lasts longer, if the increase in energy prices is higher, then we will have to run our models and see what happens.”
The ECB will update its quarterly forecasts when it next sets monetary policy in less than three weeks. In December, it saw inflation in the first quarter at 1.9%.
Source : Bloomberg.com
