Eurozone's February preliminary Consumer Price Index (CPI) reading of +1.9% year-over-year (y/y) has surprised analysts, who had expected +1.7%. This unexpected increase in inflation could have significant implications for monetary policy, particularly in the context of the ongoing US-Iran tensions. The market's reaction is telling: traders are now considering a potential rate hike by the European Central Bank (ECB) before the end of the year, with a 25% probability assigned to this scenario. This shift in sentiment highlights the growing concern about persistent price pressures.
The core CPI, which excludes volatile food and energy prices, also increased to +2.4% y/y, surpassing the expected +2.2%. This further underscores the challenge of managing inflation expectations. With the balance of power now tipped towards the markets anticipating interest rate hikes rather than cuts, policymakers face a delicate task.
In the coming weeks, policymakers will need to carefully analyze the latest data alongside the rising energy prices. Will the ECB adopt a more hawkish stance? It's unlikely, as the central bank is expected to maintain a cautious approach. The focus will likely remain on keeping the status quo, with policymakers emphasizing the need for time to assess the impact of the US-Iran conflict on price developments. Despite the potential for a temporary spike in energy prices, the ECB is likely to downplay it as "transitory," a phrase that has become infamous in monetary policy discussions.
