Producer Prices Surge to Record High in Euro Area as Stagflation Risk Rises

A man walks past the Euro sculpture in Frankfurt, Germany, on March 11, 2021. (Michael Probst/AP Photo)

Producer price inflation in the eurozone surged to a record high in the year through March, the European Union’s statistical agency reported, delivering a fresh sign that inflationary pressures continue to bedevil economies around the world and reinforcing concerns about stagflation.

The European Union’s statistics office Eurostat said in a May 3 statement (pdf) that the euro area’s producer price index, which tracks inflation before it hits consumers, rose by an annual 36.8 percent and a monthly 5.3 percent in March, the fastest pace on record.

Skyrocketing energy costs, which vaulted by a staggering 104.1 percent year-over-year and 11.1 percent month-over-month in March were behind the bulk of the wholesale price surge.

Excluding energy, producer prices were up a more modest 13.6 percent year-over-year and 2.1 percent month-over-month.

Meanwhile, euro zone unemployment fell to a fresh record low of 6.8 percent in April, with the tightening labor market suggesting more upward pressure on wages, which could feed into inflationary pressures.

The sky-high producer price readings are also likely to amplify concerns about inflation more broadly, as higher wholesale prices tend to get passed along to consumers.

Consumer price inflation in the euro area accelerated in April to an annual 7.5 percent, up 0.1 of a percentage point from March, according to Eurostat data (pdf).

As with producer price inflation, the main factor pushing up consumer prices was the rising cost of energy, which rose 38 percent in annual terms in April.

Meanwhile, euro area consumer price expectations for the next 12 months edged down only slightly in April after hitting a record high in March, according to the most recent European Commission’s Economic Sentiment Indicator (pdf).

Selling price expectations in the euro area over the next three months, however, rose to a new all-time high. This suggests inflationary pressures are likely to persist for longer, with analysts at ING saying in a recent note that the risk of stagflation in the euro zone is increasing.

“The lockdowns in China, as well as the war in Ukraine, will weigh on supply chains, not only increasing price pressures further, but also creating additional production disruptions and delays,” the analysts wrote.

“Add to this the currently discussed ban on Russian oil imports and the pending scenario of supply disruptions of Russian gas, and risks to the economic outlook are clearly tilted to the downside,” they added.

The analysts predicted that pressure is building on the European Central Bank (ECB) to move more quickly to raise interest rates before the deteriorating economic forecasts become a reality and put pressure on policymakers to keep rates low to stimulate growth.

“This worsening economic outlook could also explain why some ECB members seem to be in a rush to hike interest rates. The fear seems to be that the window of opportunity to end net asset purchases and start the rate lift-off could be closing rather soon,” ING analysts wrote, noting the growing likelihood of the first rate hike in July, potentially followed by a second one in September.