As we wrote yesterday, the inflation data in the Eurozone being released throughout the week could adjust the pressure the ECB faces today when it delivers its latest monetary policy decision. Yesterday inflation data for Italy was published showing inflation at a 26-year high at 4.8% year on year. The European sovereign debt crisis did admittedly constrain inflation in Italy over the past decade, however, the near 1% beat versus expectations and December’s reading wrong footed the market yesterday overhauling incumbent inflation expectations.
The main driver of inflation in Italy continues to be energy cost as is the theme across much of Europe and indeed the world. However, there is an increasingly broad base of inflation with notable month on month price increases coming from components including food and services. Core inflation flash readings for January also outpaced inflations amidst robust inflationary pressures within (particularly) Atlantic bordering member states.
The market has already priced in 25 basis points worth of hikes within the ECB’s deposit rate before the end of the year. This pales into insignificance when compared with the monetary action priced in in the United States and those nations further along their normalisation cycles. However, it is still sufficiently developed for the market to reflect their disappointment within the Euro should President Lagarde disappoint markets today.
Having so far stuck to the narrative that inflationary pressures will fade towards the end of the year and that no rate hikes will take place in 2022, there is growing pressure on the ECB to take action on rising inflation. Lagarde is still likely to downplay the severity of inflation placing it as a transitory and predictable by-product of the recovery from the pandemic.
Discussion and Analysis by Charles Porter