Inflation in Eurozone falls less than expected

ECB Expected to Keep Increasing Rates

Frankfurt: Eurozone inflation fell less than expected last month and underlying price growth surged, reinforcing the case for the Europe a Central Bank to keep ralsing interest rates at a brisk pace, data from Eurostat showed on Thursday.

Consumer price inflation in the 20 countries sharing the euro currency eased to 8.5% in February from 8.6% a month earlier as a big fall in energy costs offset a price surge in nearly all other areas, but still came in above expectations for 8.2% in poll of economists.

Although overall inflation is well below its double-digit highs of October it continues to broaden, Fuelling fears the earlier surge has seen ped into economy viasocal led second-round effects, making it more difficult toro of out. Underlying inflation, which filters out volatile food and fuel prices, an indicator closely watched by the ECB, jumped to 5.6% from 5.3%.co ming well above expectations for a steady reading

The ECB has promised another half-percentage po Thursday int rate hike for March 16 to fight inflation, but grim data is already shifting the debate to subsequent meetings as markets continue to raise their bets on just how high the ECB will need to go.

"Today's print, with core inflation proving still very sticky not only seals the deal for a 50 bps rate hike in March, but also paves the way for an analogous mone tary policy tightening in Q2," Paolo Grignani at Oxford Economics said. Investors now see the ECB's2.5% depo- sit rate rising by a combined 100 basis points in March and May then to around 4.1% at the turn of the year, with markets having priced in an extra 50 basis points of hikes in the past month alone.

Market pricing has mo ved up so much that some even see a risk the ECB will hike by more than 50 basis po ints this month, despite its explicit guidance, which was confirmed again by ECB chi ef Christine Lagarde on Thursday

Problem is that underly high." ing inflation is a leading indi cator on the durability of pri- ce growth and its stubbornri se suggests that getting the headline rate down to the ECB's 2% target may be pro- tracted Price growth in ser vices, the biggest component in core inflation, accelerated to 4.8% from 4.4%, a big wor rysince the sector is especial ly sensitive to wage growth and the rise suggests an acceleration in labour costs.

"High wage increases co uld imply that especially ser vice price inflation could re main elevated in 2020-2024," Nordea analysts said in a no- te "Given that the weight of services in the headline infla tion is 44% and in core toda tion 62%, elevated service price inflation will keep also the aggregate level inflation high."

Bundesbank President Joachim Nagel has already argued that the recent fall in energy prices only lowers short-term inflation and do es does not improve medium term prospects, so the KCB may need to opt for another large rate hike in May but Lagarde argued that disinflation will pick up speed from next month as surging gas prices at the onset of Russia's war in Ukraine get knocked out of base figures.