Producer prices in the Eurozone have decreased for the first time in two and a half years. This is due to a easing of supply-driven inflation factors, but concerns about a wage-price spiral remain, so monetary tightening is expected to continue for the time being.
On the 5th (local time), according to Eurostat, the statistical office of the European Union (EU), producer prices in the Eurozone fell by 1.5% year-on-year in May. This marks a shift from a 0.9% increase in the previous month to a negative figure, with the decline exceeding market expectations (-1.3%). It is the first time since December 2020 that producer prices in the Eurozone have turned negative.
As producer prices, a leading indicator of consumer prices, have turned negative, there are observations that inflation in the Eurozone has begun to slow down. The Eurozone has experienced a higher rate of price increases compared to other major countries such as the United States, due to factors like the sharp rise in natural gas supply prices caused by the Russia-Ukraine war.
Since the outbreak of the Russia-Ukraine war in February 2021, producer prices in the Eurozone have soared for over a year and a half, peaking at 43.3% in August last year. Foreign media interpreted this as "a sign that the rapid price increases that have troubled Eurozone businesses and households are beginning to retreat."
Nomura Securities forecasts that inflationary pressures in the Eurozone will ease at an even faster pace next year. According to the ECB's quarterly household survey, expected inflation in the Eurozone fell from 4.1% in April to 3.9% in May, showing a decline for three consecutive months. Karsten Brzeski, an economist at ING Bank Netherlands, said, "The fact that expected inflation recorded its lowest level since March proves that the Eurozone's disinflation process is gaining momentum."
He predicted, "By the end of this year, core inflation will ease faster than the ECB currently expects." This analysis is based on the resolution of supply chain disruptions and supply factors caused by the Russia-Ukraine war, which have driven global inflation since last year, leading to a slowdown in inflation rates in the second half of this year.
However, concerns about demand-driven inflation remain if the robust labor market situation leads to a wage-price spiral. The consumer price inflation rate in the Eurozone for June was 5.5%, still more than double the European Central Bank's (ECB) target of 2%. The core inflation rate rose slightly to 5.4% from 5.3% in the previous month.
The ECB is expected to continue its tightening measures even during a recession phase to bring inflation back to its target. The market anticipates that the ECB will implement two baby steps (0.25 percentage point hikes in the key interest rate) at the monetary policy meetings scheduled for July and September this year. Having started raising interest rates somewhat later than major countries like the United States, the Eurozone has raised its key interest rate to around 4.0% over the past year since July last year.
The fact that the Eurozone economy is cooling rapidly is expected to weigh on the ECB's further tightening efforts. The Eurozone has already entered a recession, with GDP growth rates of -0.1% in the first quarter, following -0.1% in the previous quarter, marking two consecutive quarters of contraction. Germany, the largest economy in the Eurozone, also entered a technical recession in the first quarter. Since the banking crisis triggered by the US Silicon Valley Bank (SVB) in March last year, lending attitudes of commercial banks have tightened, and housing borrowing costs have risen, posing obstacles to the Eurozone economy, which is highly dependent on loans. The average mortgage rate in the Eurozone is 3.58%, nearly double the 1.78% rate from a year ago.
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