“The latest inflation figures… confirm the necessity of a gradual but resolute monetary normalization,” Francois Villeroy said Tuesday, during a speech at France’s banking and insurance supervisor.
He’s correct on the “resolute” part. Some might gently suggest the price data argues for a rapid, not “gradual,” removal of accommodation. The only problem is, monetary policy’s capacity to address an inflation problem driven by exogenous shocks is limited. The only foolproof method for controlling the situation entails the adoption of a scorched-earth strategy. Central banks can engineer widespread demand destruction, a euphemism for recession.
Sooner or later, advanced economies and developed markets will solve the problem on their own. The cure for high prices is, after all, high prices. It’s not quite that simple. There’s some messy price elasticity stuff that needs sorting out, but eventually it comes down to a simple reality: People can’t buy what they can’t buy.
“While high prices at the pump might deter consumers, if a business needs to get goods from point A to point B, it’s going to pay those higher prices,” one mainstream financial media outlet ventured, in a boilerplate article. That’s an exercise in question-begging. Goods don’t need to get from point A to point B (or any other point for that matter), if no one can afford to buy them. Once economies reach that threshold, a downturn ensues and prices fall as demand recedes.
France is teetering. As Villeroy surely noticed, the French economy contracted in the first quarter according to downwardly-revised data out Tuesday (figure below).
Inflation data, also out Tuesday, showed price pressures building. The national gauge hit 5.2%. On a harmonized basis, prices rose 5.8% YoY, a record.
Insee cited “the acceleration of energy, service, food and manufactured good prices.” So, the acceleration of prices for pretty much everything. Energy prices rose 28% YoY. Every major category is rising faster than the ECB’s target.
“We believe the French economy is currently in recession and we are revising down our growth forecast for 2022,” ING said. “The data on consumption in volume of goods for the month of April, published by Insee this morning, indicate a further decline in household consumption.”
Meanwhile, the flash read on inflation for the eurozone was predictably hot. With French inflation running ahead of consensus and Germany reporting a sharp increase, another overshoot was virtually guaranteed. CPI rose 8.1% in May (figure below), Eurostat said Tuesday. That was ahead of consensus (7.8%) and near the top-end of the forecast range.
Excluding energy, food, alcohol and tobacco (the stuff people need and want), prices rose 3.8% YoY, tamer than the headline print, to be sure, but still hotter than anticipated.
Europe is now destined for stagflation and, likely, recession. Inflation figures for Italy, also out Tuesday, showed prices rose 7.3% YoY, more than the highest estimate. The Italian economy expanded a meager 0.1% in Q1. Ignazio Visco cited a “significant risk” of subpar growth going forward.
The ECB is compelled to do something, but that something will exacerbate the growth drag. Although most officials are keen to pretend an unprecedented 50bps move isn’t up for consideration, it plainly is. Simple math suggests headline inflation can’t possibly fall anywhere near the ECB’s target by year-end absent a total collapse in demand.
The market expects 115bps of hikes from Christine Lagarde through December.
amazed we haven’t seen energy and food having similar impacts on Japan’s headline numbers. Kuroda is having a nice go at playing Atlas.