An inflation surprise for the ECB. Two of the biggest economies in the Eurozone, France and Spain, saw a surprise gain in consumer prices in February, seemingly causing a sell-off in Euro-area bonds, according to Bloomberg News. The Harmonised Index of Consumer Prices in France rose by 7.2% from the previous year, driven by the rise in food and services prices. Meanwhile, the flash estimate of the Consumer Price Index for February jumped 6.1% in Spain. Analysts polled by Bloomberg anticipated the figures to be unchanged in France and to actually decelerate in Spain. Market expectations of the ECB terminal rate are now reaching 4%.
ECB Chief Economist Philip Lane, in an interview with Reuters published Tuesday, said that although inflationary pressures are beginning to ease, the ECB will continue with rate rises until necessary. He said, “Our assessment of December remains solid, that we needed a sequence of 50 basis point hikes to bring us inside a zone where we would need to think harder about whether rates are sufficiently restrictive to deliver the return of inflation to 2%… It could be quite a long-lasting period, a fair number of quarters, but not forever.” He also said “…there’s significant evidence that monetary policy is kicking in… For energy, food and goods, there’s a lot of forward-looking indicators saying that inflation pressures in all of those categories should come down quite a bit.”
Economic uncertainty dampens US consumer confidence. US consumer confidence saw a surprise decline in February. The Conference Board Consumer Confidence Index fell, for the second month in a row, down to 102.9 in February from 106.0 in January. A measure of expectations, which reflects consumers’ six-month outlook, saw a 69.7 drop, the lowest since July, while the gauge of current conditions climbed to 152.8. However, and critical for the economy, spending is likely to remain supported, with the Conference Board survey showing the share of consumers viewing jobs as “plentiful” rising back to levels seen in the Spring of 2022.
Ataman Ozyildirim, senior director for economics at The Conference Board said, “…the outlook appears considerably more pessimistic when looking ahead. Expectations for where jobs, incomes, and business conditions are headed over the next six months all fell sharply in February.”
A research note from Bank of America (BoA) Global Research said interest rates in the US could reach close to 6% due to strong consumer demand and a stubbornly tight labour market, forcing the central bank to battle inflation for longer. “Aggregate demand needs to weaken significantly for inflation to return to the Fed’s target. Further supply-chain normalisation and a slowdown in the labour market will help, but only to a degree,” BofA said in a note dated 27 February. The firm said, “…these processes are taking longer than we and markets were expecting.” The market is currently pricing in rates at around 5.4%.
BoE official says falling energy costs may help drive consumer spending. BoE policy maker Catherine Mann said lower natural gas and electricity costs “might be good from the standpoint of making households feel more comfortable… On the other hand, what they aren’t going to spend on energy, they’re going to spend on something else.” She said, “That translates something that I do not control, which is external energy prices, into something that looks a whole lot more like what I’m supposed to control, which is domestically generated inflation.”
A report by the British Retail Consortium today showed that inflation in major British store chains set a new record in the 12 months to February. Overall shop price inflation was at 8.4% in February, up from 8.0% in January. Fresh food inflation also jumped to another high, up 16.3% this month, from the previous record of 15.7%. Prices of other food items climbed 14.5% from 13.8% in January. BRC Chief Executive Helen Dickinson said, “Shop price inflation rose to another record high as retail prices across the board continued to react to the impact of soaring energy bills, higher running costs and tougher trading conditions brought about by the war in Ukraine.”