J.P. Morgan: Eurozone inflation continues to rise

J.P. Morgan: Eurozone inflation continues to rise

Inflation Eurozone
Eurozone.jpg

For the 11th consecutive month, eurozone inflation surprised to the upside in May. The flash estimate for headline inflation rose to 8.1% year on year (y/y) while the core measure, that strips out energy, food, alcohol and tobacco rose to 3.8% y/y – both new records.

Ordinarily the European Central Bank (ECB) would like to look through a supply shock in setting policy, but the challenge is that it comes at a time when underlying inflationary pressures in the economy continue to build. Workers are feeling increasingly empowered to ask for a pay rise to handle higher prices and this points to more persistent price pressures in the pipeline. A negative policy rate no longer looks appropriate in this economic environment and we expect the ECB will raise rates into positive territory before long.

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