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The spell of disinflation is broken – the pressure on the ECB is intensifying
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The spell of disinflation is broken – the pressure on the ECB is intensifying

created Daniel Kostecki28 February 2023

European equities seem to be falling today after yesterday's quite successful session, and inflation readings do not seem to support this. The sectors of real estate, utilities and consumer goods performed the worst after the publication on the stock market. Investors got acquainted with fresh data on CPI inflation in Spain and France, which showed that in February inflation in both countries accelerated for the second month in a row.

The figures were also higher than expected, showing that inflationary pressures remain entrenched in the economy and further evidence that the ECB will need to continue raising interest rates to bring inflation under control.

Spain's annual inflation rate was 6,1% in February, surpassing last month's figure of 5,9%, the statistical office said on Tuesday in its preliminary report. The reading was above market expectations. On a monthly basis, the consumer price index (CPI) increased by 1%.

The increase in electricity prices was the biggest contributor to the increase, followed by an increase in the prices of food and non-alcoholic beverages. Meanwhile, CPI data excluding food and energy jumped 7,7% year-on-year in February and was up 0,7% from January.

France's consumer price index (CPI) rose 6,2% in February, according to a preliminary report by the country's statistical office published on Tuesday. INSEE. This figure is higher than January's annual inflation rate of 6%.

https://twitter.com/CMCMarkets_PL/status/1630486997243396098

It is expected that the rise in the inflation rate will take place as a result of acceleration in food prices (14,5% vs. 13,3% in January) and services prices (2,9% vs. 2,6%). On a monthly basis, consumer prices increased by 0,9%, while the Harmonized Index of Consumer Prices jumped by 7,2% year-on-year and by 1% month-on-month. In the HICP methodology, inflation in France reached a new high.

What can the ECB do?

President European Central Bank (ECB) Christine Lagarde told the Financial Times that she has every reason to believe the central bank will raise rates by 50 basis points at its next meeting in March.

Lagarde said the ECB would raise rates more if necessary, and would rely on data to make rate decisions after March. The board is also ready to do whatever is needed to bring inflation back to the 2% target.

According to the interest rate market, the 3-month euro interest rate in 9 months may increase to 3,91 percent. from the current level of around 3%. This may mean not only an increase of 50 points in March, but also a continuation of the cycle.

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About the Author
Daniel Kostecki
Chief Analyst of CMC Markets Polska. Privately on the capital market since 2007, and on the Forex market since 2010.