(Kitco News) - Eurozone inflation in the month of May hit 8.1% vs the analyst expectations of 7.8% (previous 7.5%). This is bound to cause a headache for the ECB and its governing members as they have been seen to be behind the curve when it comes to normalizing monetary policy.
Stocks had a negative reaction to the news as the DAX moved to session lows at 0.78% lower on Tuesday. EUR/USD (-0.42%) is also trading lower but this could be seen as strange as a high inflation reading could cause the ECB to tighten quicker than some analysts had anticipated. The German 2-year yield picked up and now trades at 0.47% with the 10-year trading also moving higher to 1.08%.
In the report, it said that the main component of euro area inflation, energy is expected to have the highest annual rate in May (39.2%, compared with 37.5% in April), followed by food, alcohol & tobacco (7.5%, compared with 6.3% in April), non-energy industrial goods (4.2%, compared with 3.8% in April) and services (3.5%, compared with 3.3% in April)
Prior to the release ECB’s Visco said monetary policy cannot counter the increase in commodity prices. He added the rate hike cycle that could start in summer must take into account uncertain economic prospects. Lastly, Visco added the key is to ensure monetary policy normalization does not lead to unwarranted eurozone market fragmentation.
