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Inflation in Europe continues to rise as investors wait for the ECB

By on May 31, 2022 0

Germany’s inflation rate is expected to reach 7.9% for the month of May, up about a tenth from the record rate of April 2022, according to Germany’s Federal Statistical Office.

The figure, based on the consumer price index (CPI) and compared to prices for the same month last year, marks the highest rate of inflation in Germany since reunification, hovering around a similar level recorded in 1973/1974 after an oil crisis.

Germany’s Federal Statistical Office, also known as Destatis, said the main reasons for expected record inflation in May are Russia’s invasion of Ukraine and soaring oil prices. energy, which jumped 38.3% compared to the same period last year. Food prices rose 11.1% over the same period.

“Since the start of the war in Ukraine, the cost of energy has increased significantly, significantly affecting the high rate of inflation,” the Destatis statement said.

“Another factor having an upward effect on prices is the disruption of supply chains caused by the COVID-19 pandemic,” he wrote.

As elsewhere in the world, the rate of inflation has increased at a rapid pace, significantly affecting the purchasing power of consumers as they face significantly higher prices for goods and services. Some analysts estimate that the whole of Europe could experience an average inflation rate of 6% this year.

Germany, which has Europe’s largest economy, is considering several policy measures to curb inflation and help consumers, including cuts to regional public transport between June and August, as well as lower petrol prices expensive for drivers.

Inflation in the EU hits a new high…again

The rapid rise in inflation is not only affecting Germany, but also the entire Eurozone, hitting a record high for a seventh consecutive month in the region.

Inflation reached as high as 8.1% in May in the euro zone, according to preliminary data from the European Statistical Office. This compares to April’s record inflation of 7.4% and beating analysts’ expectations of 7.8%.

The surge in inflation in the region was driven by a sharp rise in the prices of goods and services in Germany and France, where inflation also exceeded expectations this month, reaching 5.8%, against 5 .4% a month earlier. Consumer prices in Spain climbed 8.5% in May, also above estimates of 8.1%.

On the back of this month’s CPI numbers still weaker, though the pair is set to post the best monthly performance in a year as Forex analysts see the European Central Bank raising rates soon to combat the surge in inflation.

The record annual spike in consumer prices was mainly fueled by rising energy prices, which rose 39.2% in May, while food, alcohol and tobacco prices jumped 7.5% during the month. Even excluding energy and food prices, inflation rose from 3.5% in April to 3.8% this month.

Soaring food and energy prices received an additional boost following Russia’s invasion of Ukraine, which led to the blocking of exports, as Western countries imposed harsh sanctions on the Russia to reduce its dependence on its gas.

On Monday, European leaders agreed to ban 90% of Russian by the end of 2022, driving up prices even further. European Council President Charles Michel said the ban will affect 75% of Russian oil imports.

ECB in brief

Meanwhile, all eyes are on the European Central Bank and how it will approach its next stage of monetary policy, as data suggests a new inflation record in the future.

The majority of economists were predicting a further acceleration in price inflation, with consensus estimates currently standing at 7.8%. Of the four largest eurozone economies, only Spain will not show rising inflation.

ECB officials are having a heated public debate on interest rates and are expected to speak before the June 9 decision closes on Thursday. While in the United States, commercial banks continue to offer positive interest rates, the ECB has implemented negative rates since 2014.

At the same time, discussions between Frankfurt staff and other European central banks are also expected to intensify as they finalize their estimates for President Christine Lagarde to disclose next week, along with a series of measures. tightening planned until September.

Klaas Knot, governor of the Dutch central bank, did not rule out a half-point hike similar to that of the US Federal Reserve earlier this month. Knot said inflation and its related underlying measures will be key data to watch over the coming weeks.

“These new numbers are extremely important in determining how quickly rate hikes will need to happen,” said Giorgio di Giorgio, a professor at Luiss University in Rome.

Last week, Lagarde said “the disinflationary momentum of the past decade is unlikely to return” even after supply constraints ease. Therefore, it seems appropriate that politics return to more normal parameters, Lagarde added.

Lagarde pointed to the most likely outcomes of subsequent central bank policy decisions, including an end to bond purchases and quarter-point rate hikes in July and September to mark the end of monetary policy under zero.

How to protect against soaring prices

Extremely high inflation figures for May will come as no surprise to many investors given that this is a dominant theme in 2022. Bonds, defensive stocks (utilities and healthcare) and real estate are among the most commonly discussed options available to investors to preserve cash. .

Additionally, commodity prices are also soaring following the Russian invasion of Ukraine, with some investors preferring to funnel money into oil to take advantage of soaring energy prices. Similarly, gold has always been seen as a hedge against inflation.

Other investors stick to the forex market. Some are turning to exotic currency pairs due to rising prices in the US and Europe. “We always thought the market had underestimated the macroeconomic risk that inflation poses,” Paresh Upadhyaya said in December 2021. Upadhyaya is senior vice president and head of foreign exchange strategy at Amundi Pioneer, which manages more of 300 billion dollars.

In a different direction, some traders are turning to major forex brokers to buy the greenback. Morgan Stanley (NYSE:) believes that the US dollar and inflation-adjusted yields will see increased demand for the Fed’s hawkish stance, at least for the immediate future. And so far, that has been the case. The has strengthened against all other major currencies, but this strength also does not come with risks.

Inflation at multi-decade highs was always destined to be a huge concern for investors, although it remains to be seen how long these CPI levels will persist and how currencies will react.