Inflation in Europe was supposed to slow in December. It didn’t.
Prices rose a record 5% from a year earlier (figure below), the flash CPI read for last month, out Friday, showed.
Economists expected a slight deceleration to 4.8% from November’s 4.9% final reading. The range, from 31 economists, was 4.2% to 5.2%.
Core stuck at 2.6%, well above target and unchanged from November.
The breakdown showed energy prices up 26%, followed by a 3.2% gain in food, alcohol and tobacco. With the possible exception of tobacco, all of those are indispensable. It’s winter. People need to be warm, full and inebriated. And not necessarily in that order.
It is likely that inflation in Europe will slow. The ECB has a more plausible claim on “transitory” than the Fed, with the obligatory caveat that the Fed thought they had a plausible claim on that most maligned of all adjectives too.
Some officials, like Governing Council member Pierre Wunsch, have argued the ECB should be more aggressive in preemptively curbing inflation pressures, but Christine Lagarde isn’t likely to be swayed. The ECB mapped out a path for bond-buying post-PEPP at its December meeting, citing “progress on the economic recovery and towards [the] medium-term inflation target,” but given the lagged nature of monetary policy effects, it’s possible inflation will have already moderated by the time any rate hikes work their “magic.” And that’s assuming you think a 10bps hike from negative levels would make a difference (try not to laugh).
In a Thursday note, BofA’s Michael Hartnett suggested a policy shock from the ECB and BoJ could be the surprise of 2022. “[The] Fed is hiking but the bigger 2022 test to credit, PEs and tech is ECB hikes and the end of BoJ YCC,” Hartnett wrote, suggesting that never-ending accommodation in Europe and Japan are responsible for capital flight to US equities (figure on the left, below).
Catalysts for faster rate hikes from the ECB could be some combination of French CPI above 4%, unemployment below 7% and oil above $100/barrel, Hartnett went on to say, adding that the BoJ may soon “hint” at policy normalization.
Japan PPI running at 9% YoY could pull CPI above 2% (figure on the right, above), he added, before reiterating that “capital flow from Europe and Asia is driven by ECB/BoJ policies of zero/negative rates,” which “has been a boon to the Nasdaq and the US dollar.”
Europe is bedeviled by Omicron and a rolling energy crisis, which French Finance Minister Bruno Le Maire dubbed an “absolute emergency” on Friday. The interplay between the two makes inflation forecasting tricky, to put it nicely.
“If we don’t find a solution in the coming days, French people will see an increase between 35% and 40% in their electricity bills,” he told a press conference in Paris. “The explosion in prices is neither sustainable for households nor for businesses.”
