Inflation Climbs to Highest since Oct 2008
Inflation in the Euro-zone climbed in April, surprising forecasts to the upside. The annual rate of the CPI is now running at 2.8%, stronger than the 2.7% seen in March. It’s the highest inflation rate since October 2008 when it was 3.2%.
The news reinforces the point of view that the ECB will continue on its tightening campaign, perhaps even slightly more aggressively if inflation continue to rise.
From Reuters: “I can imagine that some market participants will expect the rate increase by the European Central Bank at an earlier date. We expected June, the market is still expecting July. I guess the consensus will now move to June,” said Piet Lammens, economist at KBC.”
Moving up prospects of an ECB rate hike to June helped support the EUR in today’s trading. and we know how interest rate expectations have driven the EUR/USD pair over the last few months not to mention just the last few days.
The ECB forecast euro-region inflation to average about 2.3 percent this year and 1.7 percent in 2012. If confronted by more data showing rising price pressures, it may want to quicken the pace of its next rate increase. That is EUR positive.
In another report from the Euro-zone we saw an index of executive and consumer sentiment slip to 106.2 from 107.3 in March, the sharpest drop since May 2010.
From Bloomberg: “A gauge of sentiment among euro-region manufacturers slipped to 5.8 in April from 6.7 in the previous month, the European Commission said today. Services confidence dropped to 10.4 from 10.8 and an index of consumer confidence eased to minus 11.6 from minus 10.6. Sentiment among builders rose to minus 24.2 from minus 25.4.’
See the full PDF release here.
An interesting take away, is that consumer inflation expectations, which have been rising at a fast pace since November 2010 stalled their advance inching down from 30.8 to 30.7. Selling price expectations among manufacturers also fell to 21.5 from 24.4
In a third release today, the unemployment rate in the Euro-zone held at 9.9 percent.
German Retail Sales Fall
Higher inflation can have a perverse impact on consumer spending. Higher prices for ordinary goods means consumers can buy less stuff, especially when its associated with higher bills at the gas station. March proved to be a bad month for of consumer spending for Germany, the largest economy in the Euro-zone.
In March, sales, adjusted for inflation and seasonal swings, decreased 2.1% from February, when they fell 0.4%. Economists had forecast a small 0.2% gain. Compared to a year ago, sales were down 3.5%.
Weaker consumer spending does not mean that Germany economy is not doing well. There seems to be just some misfire in the engine. Germany’s unemployment dropped to a 19-year low, mainly on surging demand for German exports. While Germany has seen booming industry and trade, the one overhang has been softish consumer spending.
Will more jobs translate to more consumer spending? A lot may ride on inflation, as it is a major risk factor. Despite these inflation risks, Germany should get through it with strong growth forecast for this year – around 2.6%.
Therefore, the retail sales data did not dent the EUR, which was buoyed by the higher CPI reading.
The ECB may have to raise interest rates as a result of higher inflation, in in the face of a weakening economic sentiment.
Nick Nasad
Chief Market Analyst
FXTimes
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