ECB tightening cycle "not over" after strong core inflation print

(Alliance News) - Inflation was confirmed to have cooled slightly in February, final figures showed, though core inflation - a keenly watched measure by the European Central Bank - edged up.

Jack Allen-Reynolds, deputy chief eurozone economist, said that it came as "no surprise" that data released this morning confirmed that eurozone headline inflation edged down in February. More interesting to Allen-Reynolds was the detailed breakdown of the figures.

According to Eurostat, eurozone harmonised inflation eased just slightly to 8.5% in February from 8.6% in January.

On a monthly basis, harmonised prices rose 0.8% in February, more than reversing a 0.2% fall the previous month.

Core inflation - which excludes energy, food, alcohol & tobacco - ticked up to 5.6% annually, from 5.3% in January. Monthly core prices rose 0.8%, reversing a 0.8% fall the previous month.

The figures were unrevised from the flash estimate released on March 2.

Allen-Reynolds said the data showed that core inflation is still very strong, which was notable as underlying inflation is one of the three key determinants of the outlook for monetary policy.

ECB President Christine Lagarde laid out the outlook on Thursday as part of the bank's latest interest rate decision.

The bank hiked rates by 50 basis points, which was widely expected.

The ECB said its approach to rate decisions will be determined by "its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission".

In a press conference after the announcement, President Lagarde said that, if underlying inflationary pressures were to persist, then the central bank would have "more ground to cover".

"Almost all measures show that it is continuing to rise. Core inflation hit a new record of 5.6% in February, and most of the alternative indicators of underlying inflation produced by the ECB and ourselves increased too," the Capital Economics analyst said.

"What's more, other data published this morning added to the evidence that wage pressures intensified at the end of last year. Hourly labour costs growth jumped from 3.8% year-on-year in the third quarter to 5.7% in the fourth quarter, echoing the acceleration in labour compensation per employee and taking both measures well above the rate of 3% which is broadly consistent with the ECB hitting its consumer price inflation target."

Allen-Reynolds added that timelier data show that the labour market remains strong, which he said suggests that wage growth will stay high this year.

"While the outlook for monetary policy is highly uncertain, the wage and price data send a clear message," he said.

"The strength of wage growth and core inflation will reinforce ECB policymakers' conviction that, provided the region's banks don't come under further sustained pressure, their tightening cycle is not over."

By Heather Rydings, Alliance News senior economics reporter

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