Producer Price Inflation in Eurozone Soars to Record High

A German worker pours molten iron into a mould at the Siempelkamp Giesserei foundry in Krefeld, Germany, on April 21, 2022. (Sascha Schuermann/Getty Images)

Producer price inflation in the eurozone surged to a record high in the year through April, though month-over-month data showed inflationary pressures edging down, as European Central Bank officials consider how fast and how much to tighten monetary settings to tame soaring prices.

The E.U. statistics office Eurostat said in a June 2 statement (pdf) that the euro area’s producer price index, which tracks inflation before it hits consumers, rose by an annual 37.2 percent in April, the fastest pace on record.

Yet the month-over-month data showed a drop in the pace of producer price acceleration, suggesting that wholesale inflation in the eurozone may have peaked and a series of softer readings could be in the pipeline. In April, euro area producer prices rose by a monthly 1.2 percent after surging 5.3 percent in March, which was a record pace.

A worker deburrs a casting at the Siempelkamp Giesserei foundry in Krefeld, Germany, on April 21, 2022. (Sascha Schuermann/Getty Images)

It comes as consumer price inflation in the 19 countries that share the euro currency jumped to a record high of 8.1 percent in annual terms in May, largely on the back of soaring food and energy prices.

Soaring inflation in countries around the world has put pressure on central bankers to reverse pandemic-era easy money policies.

The Federal Reserve has laid out a case for hiking interest rates by 50 basis points at each of its next two meetings in June and July, though there’s less clarity on the path of policy normalization after that.

ECB officials, too, have made a case for ending asset purchases and embarking on a path of raising interest rates. Christine Lagarde, head of the ECB, recently suggested that quarter-point hikes in July and then September were likely.

European Central Bank President Christine Lagarde addresses the European Parliament during a debate on the 2018 annual report of the ECB in Strasbourg, France, on Feb. 11, 2020. (Vincent Kessler/Reuters)

Lagarde wrote in a recent blog post that she expects net purchases under the ECB’s asset-buying program to end “very early in the third quarter,” paving the way for the central bank to start boosting rates in July. The ECB’s key policy interest rate is currently set at minus 0.5 percent.

“Based on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter,” Lagarde wrote.

Some analysts believe the ECB might tighten faster than by 25 basis points to match the Fed’s beefier 0.5 percentage point hikes.

“The ECB has clearly passed the stage of discussing whether and even when policy rates should be increased. The only discussion seems to be on whether the ECB should start with a 25 [basis point] rate hike in July, or move faster with a 50 [basis point] hike,” analysts at ING said in a note.

“If both headline and core inflation increase further in the coming weeks, a 50 [basis point] rate hike in July will still be on the table,” they added.

Core inflation—which strips out the volatile categories of food and energy and is viewed as a better measure of underlying inflationary pressures—jumped last month in the euro area from 3.5 to 3.8 percent, suggesting that high input prices are being passed down to consumers at a fast pace.

Francois Villeroy de Galhau, chief of the central bank of France and an ECB Governing Council member, said recently that next week’s ECB meeting will be “decisive” in laying out a response to surging prices.

Villeroy de Galhau noted in a speech at an economics conference in Paris that core inflation is nearly double the ECB’s target of 2 percent.

“Inflation is not only too high, but also too broad,” Villeroy de Galhau said. “This requires a normalization of monetary policy.”