European Inflation Hits Fresh Record High of 9.1%, Adding to Fed Concerns

European inflation sped to a fresh record high of 9.1% in August, confirming the Fed’s reluctance to veer from its rate hike path.

European inflation surged to a fresh record high this month, data from the region’s official statistics office indicated Wednesday, adding to rate hike expectations from the European Central Bank and testing assumptions for easing U.S. price pressures over the back half of the year.

Europe’s headline inflation rate was estimated at 9.1% for the month of August, topping analysts’ forecasts of a 9% reading and accelerating firmly past the 8.9% tally recorded in July for the 19 countries that share the single currency. 

Stripping away food, energy, alcohol and tobacco prices, so-called core inflation was pegged at 4.3%, another all-time high.

While Europe’s energy issues, particularly with respect to soaring natural gas prices as a result of supply disruptions from Russia, are largely unique, the upward march of inflationary pressures will be closely watched here in the United States, where the Federal Reserve has been reluctant to ease from its rate hiking path despite a pullback in headline price pressures over the summer months.

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“Specific European problems continue to push inflation higher,” said ING’s senior economist Bert Colijn. “The gas supply crisis and droughts are adding to persisting supply-side pressures on inflation at the moment.”

“As the economy is slowing rapidly — and perhaps already contracting at this point — the question is how much the ECB needs to slam the brakes.”

Bets on a 75 basis point rate hike from the ECB, which meets on September 8 in Frankfurt, have been rising steadily over the past week and are trading well north of 50%. 

That could add further upward pressure on rate hike expectations for the Fed, which unveils its next policy move on September 21.

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Last week, the Fed’s preferred inflation gauge, the PCE Price Index, fell for the first time in more than two years in July, a move the Chairman Powell welcomed, but warned that “a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down.”

Powell added that another “unusually large” rate hike might be appropriate in September, but noted that no decision has been taken and the size of the move “will depend on the totality of the incoming data and the evolving outlook.”

The CME Group’s FedWatch suggests a 70.5% chance of a third consecutive 75 basis point hike from Chairman Jerome Powell, a move that would take the benchmark Fed Funds rate to a range of between 3% and 3.25%.

The U.S. dollar index, meanwhile, jumped 0.26% against a basket of its global peers — most heavily weighted by the euro — to trade at 109.065 immediately following the European inflation data. 

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