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Eurozone inflation hits record 8.6% in June

Price growth in the eurozone hit a record high of 8.6 per cent in the year to June, intensifying tensions between rate-setters at the European Central Bank over the speed of its planned interest rate rises.

Eurozone inflation increased from 8.1 per cent in May, after a sharp acceleration of energy and food prices in many countries due to supply disruptions caused by Russia’s invasion of Ukraine. Rising price pressures in the bloc more than offset a slowdown in German inflation driven by transport and electricity subsidies to cushion the higher cost of living.

Economists polled by Reuters had expected eurozone inflation of 8.4 per cent. Claus Vistesen, an economist at Pantheon Macroeconomics, said the bigger than expected rise “increases the risk” that the ECB will raise rates by more than its planned quarter percentage point at its meeting in three weeks’ time, adding the central bank was “miles behind the curve”.

ECB president Christine Lagarde said at the bank’s annual forum in Sintra, Portugal, this week that it would stick to its plan to begin raising interest rates with an increase of 25 basis points on July 21. She said a bigger move was likely in September, unless there is a swift slowdown in inflation.

However, some hawkish rate-setters on the ECB’s governing council plan to push for a larger rate rise of 50bp in July because of concerns that price pressures show few signs of easing.

Sweden’s Riksbank this week accelerated the pace of its rate rises to 50bp in response to soaring inflation, mirroring similar moves by central banks in Switzerland and Norway. The US Federal Reserve last month raised interest rates by 75bp.

Unemployment in the 19 countries that share the euro fell to a new record low of 6.6 per cent in May, which is likely to add upward pressure on wages. The ECB has forecast that wage growth in the bloc will double to 4 per cent this year.

Christoph Weil, an economist at Commerzbank, predicted eurozone inflation would be 7.5 per cent by the end of this year, well above the ECB’s 2 per cent target. “Unions will demand at least partial compensation for higher inflation in the upcoming wage negotiations,” he said. “Wage inflation is therefore likely to increase significantly.”

The ECB is juggling a difficult balancing act between reversing almost a decade of ultra-loose money to rein in rampant price growth while trying to avoid dragging the region into a deep recession or another debt crisis after borrowing costs rose sharply in weaker countries such as Italy.

Inflation rose in 17 of 19 eurozone countries in June, slowing only in Germany and the Netherlands, according to a flash estimate from Eurostat on Friday. It rose at double-digit rates in nine member states and was above 20 per cent in Estonia and Lithuania. The lowest inflation rates were in Malta and France at 6.1 and 6.5 per cent respectively.

Energy prices rose by an all-time high for the eurozone of almost 42 per cent in June after Russia reduced natural gas supplies to Europe. Food, alcohol and tobacco prices in the bloc were up 8.9 per cent, reflecting disruption to supplies of agricultural commodities caused by the Ukraine conflict.

“Even if demand comes down more drastically over the next few months, we think not all input costs have passed through the system yet,” said Marcus Widén, an economist at SEB. “This applies definitely to food and energy, but also to core goods and services.”

Core inflation, excluding more volatile energy and food prices, slowed slightly to 3.7 per cent in June, reflecting cheaper public transport due to government subsidies. These measures included Germany’s temporary €9 monthly train ticket, which helped to slow the country’s inflation rate to 8.2 per cent.

Services price growth in the eurozone slowed to 3.4 per cent, while non-energy industrial goods prices continued to accelerate at 4.3 per cent.

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