ECB Doomed As Inflation Hits New Record, Growth Slows

A week of disconcerting inflation data out of Europe culminated Friday in another record high headline print on the bloc-wide gauge.

Consumer prices in the euro-area rose 8.6% YoY last month (figure below), preliminary data showed. That was more than the 8.5% economists expected. The median estimate from forecasters has consistently trailed the headline for most of the past year, underscoring both the futility of forecasting and the persistent nature of the inflationary impulse.

The core measure rose a comparatively tame, but nevertheless hot, 3.7% on a 12-month basis. That was slightly below consensus and marked a notable, albeit meaningless from the perspective of consumers, deceleration from May’s annual rate.

Needless to say, the bulk of the gain on the headline index was attributable to energy prices, which rose nearly 42% YoY. Europe is grappling with an existential gas crisis which threatens to tip the bloc’s largest economy into an “imminent” recession, to quote Deutsche Bank’s assessment of Germany’s plight.

Russia curbed gas flows to Europe by more than half over the past several weeks, pushing Germany to the brink and forcing utility giant Uniper to seek a government bailout. But it’s not just energy. Food, alcohol and tobacco prices rose 8.9% in June compared to this time last year in Europe, Friday’s data showed.

The figures pile still more pressure on the ECB, which is poised to hike rates for the first time in some younger market participants’ professional careers this month. If it’s not obvious that Fed hikes are the right prescription for inflation driven mostly by supply factors, it’s even less obvious in Europe and the UK. The ECB runs the very real risk of exacerbating a burgeoning growth slowdown with little, if anything at all, to show for it on the inflation front. The figure (below) illustrates the likely futility of this endeavor.

Inflation will either come down or it won’t. Either way, the outcome won’t be attributable to a handful of rate hikes from a negative base.

Markets have trimmed expectations for policy tightening to under 150bps by year-end from as high as 190bps last month. Rates will still be negative after this month’s planned 25bps hike, and will only turn positive following an assumed September move, which ECB officials have variously suggested will be a 50bps increment, consistent with the messaging from June’s policy statement. Terminal rate pricing is around 1.70%. It was above 2.50% at one point in June.

Earlier this week, data out of Spain showed inflation reached double-digits. Things aren’t much better in Italy, and while German inflation ebbed, the relief was attributable to government intervention. Paradoxically (and this is a sign of the times) the more politicians do to offset pressure on households from high inflation, the more inclined the ECB will be to hike rates. “The peak of euro-area inflation has yet to be seen, as has, in our opinion, the peak of the ECB’s hawkishness,” SocGen said. “The ECB is showing increasing signs of unease as regards euro-area fiscal policy, as various measures to protect consumers from rising energy prices are being extended.”

The final read on S&P Global’s bloc-wide manufacturing PMI, also out Friday, ticked higher from the flash print, but at 52.1, the gauge is uncomfortably close to contraction. At 45.2, the new orders index is deeply depressed, and contracted for a second month. The output index is below 50.

“Demand is now weakening as firms report customers [are] growing more cautious in relation to spending due to rising prices and the uncertain economic outlook,” Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said. “The downturn looks set to gain momentum in coming months.”

Again: The ECB is hiking into a slowdown. And they have no choice.