Eurozone inflation rises to new record high in May

The Eurozone inflation rose to new record high at 8.1% in May, from 7.4% previous month and in line with expectations, while core inflation, stripped from volatile food, energy, alcohol and tobacco components rose to 3.8% in May from 3.5% previous month.

The strong rise in prices was initially driven by enormous printing of money and supply shortages and strongly boosted by the consequences of the war in Ukraine which caused the domino-effect on soaring energy prices that affected everything and made inflation broad based.

Current level of inflation, which is four times above ECB’s 2% target causes a headaches to everyone, from households, companies to the European Central Bank.

The main contributor to further inflation rise was energy with 39% cost rise, followed by unprocessed food (9%), industrial goods (4.2) and services (3.5%).

Fresh rise in inflation, with no signs of peaking soon, put the ECB under increased pressure, as the central bank was so far on hold and has fallen behind the curve, while other major central banks already hiked interest rate several times, and just in the June policy meeting signaled it will raise borrowing costs by 0.25% in July and again in September, with possible bigger increase if situation worsens by then.

Many economists criticized the ECB for not reacting on time and suggest that July hike might be late, as the central bank needs first to move the rate out of negative territory (-0.5%) and then start to increase, while the inflation is already unleashed and many speculate about a double-digit figures in coming months, with ECB’s projections of price growth at 6.8% this year (based on inflation peaking at around 7.5%) are already invalid, while projections for 2023 (3.5%) and 2024 (2.1%) very likely to be revised.