It’s Bad In Europe

Surprise! European inflation printed ahead of estimates for the sixth consecutive month.

Consumer prices likely rose 10.7% from a year ago in October (figure below), easily faster than the 10.3% economists projected.

Core inflation was 5% this month, eurostat said. For context, core was running at 2% this time last year.

The news came just days after Christine Lagarde doubled rates. Although the pace of tightening is unprecedented, policymakers plainly believe the window for front-loading is closing. Lagarde’s second consecutive 75bps hike was accompanied by a dovish statement which jettisoned a reference to hiking for “several meetings” in favor of a new, less hawkish, nod to tightening “further.”

It scarcely matters. I’m adamant that the bank’s capacity to influence price growth is limited — that inflation outcomes depend largely on the evolution of energy prices, the success of the bloc’s plans to contain them and, relatedly, the war in Ukraine. Monday’s data (and concurrent developments in the war) underscored that contention. The ECB has raised rates by 200bps since July. Over the same period, headline inflation has risen 180bps.

Energy prices rose 6.5% from September and 41.9% YoY this month. The 12-month pace nearly matched June’s 42%. Unprocessed food prices rose 15.4% YoY, nearly three full percentage points faster than last month’s annual pace.

Russia over the weekend pulled out of a key arrangement allowing trapped Ukrainian grain to reach international markets following drone attacks on its Black Sea fleet. On Monday, Russian missiles struck targets inside Ukraine. Escalations are conducive to higher food and energy costs.

In addition to the unprecedented rise in energy prices and 15% food inflation, prices for non-energy industrial goods rose 6% in the euro-area this month, triple the annual pace seen this time last year, while services prices rose 4.4%, more than double the 12-month rate observed in October of 2021.

Data out last week showed inflation in Germany accelerated to a harrowing 11.6% in October. Across the 19-nation bloc, annual inflation was double-digits in 11 countries, and 15% or more in five if you round up Slovakia’s 14.5% rate.

“The low prices on the wholesale market in recent weeks are clearly not yet translating into declining prices for households [and] it’s likely this will only happen in a few months’ time and even that is a big ‘if’ because it depends on uncertain factors such as energy supply and the weather,” ING said Monday, adding that second round effects of supply-side shocks “keep pushing up inflation despite moderating demand.”

Imagine that, right? When supply is distorted beyond recognition, what happens to demand is secondary if it matters at all.

GDP data released concurrently showed the eurozone economy grew 0.2% from Q2 (figure below), better than expected, but a much slower pace compared to prior quarters.

Ultimately, it’s far-fetched to believe the bloc won’t succumb over the next several months. The macro circumstances are as onerous as they could be outside of a doomsday scenario. Inflation is double-digits, the monetary authority has doubled interest rates in the space of 45 days and there’s a shooting war next door.

Recession seems guaranteed, whether the ECB admits it or not. Tellingly, policymakers are about as close to conceding it as policymakers are inclined to come. Klaas Knot on Sunday said a downturn is “becoming more and more likely.” When central banks concede the likelihood of a recession, you know it’s bad.


 

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