Ex-Energy Euro Inflation Hits Record, Services CPI Hits Record High. Subsidies, Energy Decline Lowers Aggregate CPI

The ECB is reacting to severe inflation, unloading large amounts of assets, and raising interest rates.

By Wolf Richter for WOLF STREET.

This was another blow to inflation: In December, the Consumer Price Index, excluding energy products purchased by consumers (gasoline, diesel, electricity, domestic natural gas, heating oil, etc.), rose to a record level. According to Eurostat, 7.2% in 19 countries that use the euro. Breathing Spike:

Fuel prices have fallen as fuel commodities have fallen and government fuel subsidies have pushed them down. But other factors, including services, are now driving inflation.

Excluding energy products, inflation started to rise in mid-2021. By February 2022, the index had reached 3.1%, the highest since data began in 2002. And then it continued to jump as inflation, outside of fluctuating energy prices, crept deeper into the economy.

The index is now being cited by ECB governors and ECB President Christine Lagarde as a reason for continuing to fight inflation despite falling fuel prices.

Inflation in services has reached a record high 4.4% in December compared to a year ago. Services include healthcare, education, housing, insurance, financial services, telecommunication services, streaming, subscription, accommodation, air tickets, repair services, cleaning services, legal services, personal services such as haircuts, etc. includes. Services are where the majority of consumer spending is. is going

All eyes are now on wage increases as the reason behind this inflation. “We know wages are rising, probably faster than expected,” Lagarde told a Croatian newspaper cited by Reuters when she was in Croatia a few days ago to welcome the country as the 20th member of the Eurozone. “We must not allow inflation expectations to come off the anchor or wages to have an inflationary effect,” he said.

Wages are the largest cost component of non-rental services, and rising wages are passed on to higher prices. This is at the heart of Lagarde’s comment on wages, and she agreed with Fed Chair Powell on this point: wage inflation will drive services inflation, and service inflation is very difficult to fight.

The headline CPI rate still fell to a whopping 9.2%energy products purchased by consumers – gasoline, diesel fuel, natural gas, etc. It fell from 10.1% in November and 10.5% in October after prices fell sharply, and government energy subsidies pushed it even lower.

Headline CPI Inflation began to rise in early 2021, a year before Russia invaded Ukraine. Inflation exploded globally as it continued to rage amid an orgy of pandemic money printing, fantastic debt-financed stimulus spending by the ECB, the Fed and others.

As of October 2021, Eurozone inflation rates were in unprecedented territory. It reached 5.1% in January 2022 before Russia invaded Ukraine. Russia’s war in Ukraine has exacerbated trends by fueling now-subduing commodity inflation:

Inflation in Eurozone countries.

in Germanywhere new energy inflation subsidies kick in, CPI fell to a still-awful 9.6%, down from November’s 11.3% and October’s record 11.6%.

Already in November 2021, long before Russia invaded Ukraine, inflation hit a then unimaginably high 6.0%.

CPI by Eurozone Country, December 2022
1 Latvia 20.7%
2 Lithuania 20.0%
3 Estonia 17.5%
4 Slovakia 15.0%
5 Italy 12.3%
6 The Netherlands 11.0%
7 Slovenia 10.8%
8 Austria 10.5%
9 Belgium 10.2%
10 Portugal 9.8%
11 Germany 9.6%
12 Finland 8.9%
13 Ireland 8.2%
14 Greece 7.6%
15 Cyprus 7.6%
16 Malta 7.3%
17 France 6.7%
18 Luxembourg 6.2%
19 Spain 5.6%

The ECB finally reacts: raises rates, unloads large chunks of assets:

After years of negative interest rate policy — the dumbest central bank absurdity ever invented — the ECB has become religious about inflation, raising policy rates by just 250 basis points to 2.0% at each of its last four meetings in 2022. the fastest interest rate hikes in history and more rate hikes are coming. They have been ridiculously far behind, but are now on the move and heading into what the ECB says is a recession.

The ECB had two main types of QE: handing cash to banks through free-money lending and injecting cash into the bond market by buying bonds. At its meeting in October, it announced the 1st step of QT: Opening of loans. At the December meeting, he announced QT’s 2nd step: bond dumping.

Step 1 of QT has already taken €850bn off the ECB’s balance sheet since the peak in June (I discussed the details here).

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