Consumer prices in the eurozone rose by a record 5.1 per cent in January piling more pressure on the European Central Bank to respond with tighter monetary policy.
The new figure defied expectations of a fall in inflation, with economists polled by Reuters expecting a rate of 4.4 per cent.
Steeper increases in the price of energy and food were only partly offset by slower growth in prices of manufactured goods, which meant annual inflation rose from its previous eurozone record of 5 per cent in December, Eurostat said.
The rising cost of living is likely to dominate the first ECB governing council meeting of the year on Thursday, even if most economists expect the bank to stick to its timetable for keeping interest rates unchanged while it steadily reduces asset purchases over the course of this year.
Bert Colijn, senior economist at ING, said he expected the ECB to “push back against early rate hikes” on Thursday. He said a fall in core eurozone inflation and the deceleration in goods prices showed “there is still no evidence of widespread second-round effects” whereby higher prices trigger sharp increases in wages.
However, higher-than-expected inflation has led the US Federal Reserve and the Bank of England to shift to a more “hawkish” policy stance than the ECB. The BoE is expected to raise rates for a second consecutive time on Thursday, while the market is pricing in five rate rises by the Fed this year.
The ECB has rejected investor bets that it will raise rates this year, saying it will not do so before it stops asset purchases, which it plans to continue at least until October.
Markets this week pulled forward expectations of a tightening in eurozone monetary policy, with a rise in the ECB’s deposit rate to minus 0.25 per cent — from its current rate of minus 0.5 per cent — now priced in by December, according to trading in short-term funding markets.
The persistence of inflation above the ECB’s 2 per cent target has already caused widening divisions on its governing council. The “hawkish” heads of the German, Belgian and Austrian central banks complained at last month’s meeting that it was committing to continue bond purchases for too long.
Krishna Guha, vice-chair of Evercore, said “a hawkish Fed-style pivot” at the ECB was “implausible” because “domestic inflation and wage dynamics are still in a very different place to those in the US and UK”.
He forecast the ECB would end asset purchases early next year before raising rates three times over the course of 2023 to put its deposit rate back in positive territory for the first time since 2014.
Compared with the previous month, eurozone consumer prices rose 0.3 per cent, indicating that underlying inflationary pressures continue to build in the 19-country bloc. The highest national inflation rate was 12.2 per cent in Lithuania, while France had the lowest at 3.3 per cent.
Soaring energy and food bills are squeezing household budgets. A quarter of German consumers said they would struggle to make ends meet this year because of higher prices, according to a survey released by the Schufa credit agency.
“Even if we have seen governments implementing some measures to offset higher energy prices, it is starting to impact consumers,” said Nadia Gharbi, senior economist at Pictet Wealth Management.
Eurozone energy prices rose by a record 28.6 per cent from the previous year in January, while growth in the cost of unprocessed food accelerated to 5.2 per cent. Services prices continued to rise 2.4 per cent while growth in goods prices slowed to 2.3 per cent.
The euro climbed 0.4 per cent against the dollar to $1.131 on Wednesday while the price of German bonds fell as the 10-year yield reversed earlier losses to rise 2 basis points to 0.05 per cent, its highest for almost three years.