EUR/USD flows: HICP up, ECB ready, details nuanced. Blog says 'its all energy' so be measured
HICP as expected, leaves ECB follow up in Sep 100% priced in
Details show all overshoot currently all in energy/processed food
An ECB Blog today (note to the hawks?), gives structural analysis that all energy supply side driven, unlike pandemic, and so requires measured response
EZ HICP rises to 3.3% from 2.9%, in line with market expectations, and seen cementing the Sep follow already signalled in the last Minutes. Market is priced pretty much 100% for a hike at that meeting.
The details of the release are a little more nuanced. Core slipped to 2.4% from 2.5%, while ex processed food and energy at 2.1% from 2.2% (mkt 2.3%) - so that measure actually very well behaved and showing where the pressure is coming through at present.
source: ECB Blog, Why the drivers of inflation matter for monetary policy, Kristina Barauskaitė Griškevičienė and Claus Brand
A blog just out from the ECB ('Why the drivers of inflation matter for monetary policy') argues that this time " the energy supply shock dominates, while demand and public policy stimulus have minor roles".
The structural analysis finds that “our estimates suggest that the current increase in headline inflation has so far, until end of May 2026, been driven almost entirely by adverse energy supply shocks.”
The conclusion – “Supply-side shocks, by contrast, push inflation and output in opposite directions, demanding a more measured monetary policy response.” This might be seen as a bit of a reminder to some of the very hawkish contingent at the last ECB meeting, although it doesn’t mean that the ECB as a whole will shift its consensus course.