Euro Zone Inflation Means No Rest for the ECB

The “inflation is transitory” script isn’t just being rewritten, it’s being torn into confetti. Euro-zone inflation may have dropped to 8.5% in February from a peak of 10.6% in October but nobody's looking at the headline figure anymore. It's all about the core measure excluding food and energy costs — and that's just seen another uptick to a record 5.6%. After arriving late at the global tightening party, the European Central Bank will be powerless to resist hiking interest rates ever further to combat second-round effects from surging energy prices.

Higher-than-expected French and Spanish consumer prices this week, with the former hitting a near 40-year peak, presaged Thursday’s report. Both France and Spain benefited during 2022 from measures that held down energy prices, but those effects seem to be wearing off. Food and service costs are now driving the bus. German inflation also came in hotter than expected this week. The flattering year-on-year base effects are wearing off.