Eurozone inflation escalates heading into dangerous summer

The eurozone inflation rate has seen a jump in volatility as it started the year at 1.4 percent to bottom out at 1.1 percent in mid-March. The annual rate fluctuated within that range, reaching 1.2 percent in April 2018.

Inflation spiked to 1.9 percent by May 2018, however, due to rising prices for oil and consumables combined with further declines for the euro. Central banks are on edge heading into summer 2018, with trade tariffs deadlines looming.

Core components

The largest bump was predominantly sourced from Romania at 4.6 percent and Estonia at 3.1 percent. The highest annual rates came from service at +0.72 percentage points, energy at +0.58 PPT and food, alcohol and tobacco at +0.50 PP. The eurozone inflation rate is measured using the Harmonised Index of Consumer Prices (HICP).

The HICP measures the rate of change for prices of consumer goods and services acquired over time as a weighted average. All participating member nations that have adopted the euro currency utilize the same measurement standards to ensure harmonized data. The European Central Bank (ECB) is tasked with forecasting and maintaining price stability, with the target inflation rate currently at 2 percent.

ECB target rate

As reported by TheStreet, the May 2018 inflation rate of 1.9 percent nearly hit the ECB target rate of 2 percent from a combination of the weakening euro and rising oil prices that reached $80 bbl. The steep jump to 1.9 percent from 1.3 percent the prior month hasn’t changed the dovish outlook, as indicated by ECB president Mario Draghi during the bank’s June meeting. He provided more clues on the 3-year-old, 2.4 trillion euro asset purchase program quantitative easing (QE).

Phase out QE

Despite the political instability in Italy and inflation rate spike in May, the ECB stated they will maintain a schedule to phase out the QE program by the end of 2018, according to The Guardian. Draghi has no concerns that Italy will leave the euro. Currently, the 30 billion euro monthly asset purchase program will be reduced to 15 billion euros from October 2018 and phased out at the end of December 2018.

As for interest rate hikes, the ECB has no plans to commence monetary tightening until at least summer 2019. Eurozone growth forecasts for 2018 were previously revised down to 2.1 percent from 2.4 percent.

Trade war escalation

Inflation continues to be a key concern for global central banks. Business Insider reports that the rising tensions over trade tariffs have stirred trade war concerns between the United States and China, EU, Canada and Mexico. The outcomes can have an immediate and sharp impact on both GDP and inflation and could accelerate interest rate hikes if inflation rates surge past target forecasts.

Dangerous July

July 2018 has many key tariff trigger deadlines. Canada’s tariffs on U.S. goods triggers on July 1, while U.S. tariffs on Chinese products take effect on July 6. In the same month, EU tariffs on U.S. goods are set to trigger.

The U.S. Treasury Department will announce restrictions on Chinese investments in the U.S. by June 30, because of a USTR Section 301 investigation in forced transfer and IP theft allegations. Expect higher than normal volatility for summer 2018.