Eurozone inflation up sharply as economies reopen

Inflation in the eurozone rose sharply last month to 2% - just above the European Central Bank's target.

Prices were pushed higher by a very strong rise in energy prices from a year ago and put inflation at its highest level since October 2018.

It comes as Covid restrictions across Europe were scaled back, boosting economic activity.

The figure plays into a debate about whether inflation after the pandemic could become a serious problem.

For much of the last decade, central banks in the developed world were worrying that inflation was too low.

Now as economies recover from the pandemic-driven downturn, inflation is climbing.

Smallest possible margin
For the eurozone, the European Central Bank has a target of below but close to 2%. So the new figure is above the target, though by the smallest possible margin.

Inflation has also increased in Britain where the latest figure 1.5%, up sharply from 0.7% the previous month although still below the Bank of England's target.

In the United States, the inflation measure used by the Federal Reserve was 3.6% last month. The Fed's target, like the Bank of England in the UK is 2%.

In the eurozone it is the first time inflation has been (just) above target in more than two years. For most of the time since the pandemic began, eurozone inflation has been below 1% and for five months until December last year it was below zero.

So that is quite a strong surge in the first half of this year.

US inflation sees biggest jump since 2008
UK inflation rate more than doubles in April
Andrew Kenningham of Capital Economics expects 
it go further to an average of 2.5% in the second half of the year.
But he also thinks it will be temporary.

The increase in inflation is driven largely by energy prices. They plunged during the Europe's first lockdown.

The turmoil in the energy market at the time was so pronounced around a year ago that some US crude oil prices even went negative, below zero, although consumer energy supplies were never that cheap.

Now that economic activity has recovered much (though not all) of the lost ground, energy prices have rebounded and compared with a year ago they are 13% higher in the eurozone.Consumer prices in the eurozone apart for energy rose a very modest 0.9%, still below the ECB target.

The impact of that rebound in energy prices will disappear in time and Andrew Kenningham expects most of the increase in inflation to be reversed next year.

There are other factors that may push prices higher - he mentions a surge in demand in travel and hospitality that could lead to some price rises.

Supply chain disruptions which raised input prices for manufacturing industry could also be passed on to consumers.

The idea that there will be a only a transitory surge in prices is held by many economists for the eurozone and other areas.

But some do see at least a possibility of a more persistent rise. The surge in consumer spending may be more widespread than tourism.

There is a lot of pent-up saving the people will want to spend. And some think that the massive stimulus provided by government spending and central bank policies in many countries could lead to substantially higher inflation.

The Bank of England's chief economist Andy Haldane spoke in February of the high degree of uncertainty about the outlook for inflation - in both directions. He said there was a "tangible risk that inflation proves more difficult to tame" than the financial markets were expecting.US inflation surged in April from a year earlier as the economic recovery picked up.

Consumer prices jumped 4.2% in the 12 months through to April, up from 2.6% in March and marking the biggest increase since September 2008.

The report from the US Labor Department comes amid fears that rising consumer prices could push up interest rates.

Some analysts said that the figures could be rising because of temporary factors like supply bottlenecks.

Inflation, which measures the rate at which the prices for goods and services increase, was pushed up by higher prices for cars and food in April.

Prices of second-hand cars increased by 10% in comparison with March - the biggest monthly increase since records began. The Labor Department said that accounted for more than one-third of the overall jump.The "core price index", which strips out food and energy costs that can be more volatile, increased 3% in April from the year before.

Off the back of the report, US stocks slid. Losses seen around the world on Tuesday extended into Wednesday amid investor concerns that higher inflation could lead the US central bank to raise interest rates more quickly than had been expected.

At the closing bell, the Dow stood at 33,587 after falling 2.0%. The S&P 500 fell 2.14% to 4,063, while the tech-focussed Nasdaq index fell 2.7% to 13,031.

In March, US President Joe Biden signed a $1.9tn (£1.4tn) economic relief bill that saw the government send $1,400 cheques to most Americans, and last month he set out plans for more government spending on jobs, education and social care.

It has led to a build-up of savings which is now being spent as the economy reopens, driving prices higher.

'A big miss'
Inflation is breaching the Federal Reserve's target of 2% and this has raised fears it might need to raise interest rates to cool things down.

Seema Shah, chief strategist at the investment firm Principal Global Investors, says the figures marked a "big miss".

"US CPI inflation has come in meaningfully higher than expected and will further stoke concerns that the Fed has misread the inflation story," she said.

"Markets were already expecting a rise in inflation - the big question is how sticky that inflation is. That has not been answered today, nor will it be answered for several months."