ECB Insight: Spain Ups the Ante With Huge Upside March Inflation Surprise

30 March 2022

By David Barwick – FRANKFURT (Econostream) – Under normal circumstances, one month’s HICP even for the entire Eurozone, let alone for any individual economy, would have few implications for the European Central Bank’s monetary policy.

Alas, the circumstances are far from being normal, and Spain’s flash estimate of 9.8% for both CPI and HICP, released Wednesday, brings into yet more striking relief the danger that many months of ECB complacency – to which some continue to cling – are coming back to haunt monetary authorities.

The Spanish figure, which topped almost all market expectations, represents a substantial surge from last month’s CPI of 7.6%, takes inflation in the region’s fourth-largest economy to a 37-year high and suggests that double-digit readings are coming.

Though much tamer, the core reading that strips out non-processed food and energy products climbed 0.4 point to a an estimated 14-year high of 3.4%.

The ECB has a long history of emphasising its focus on the medium term, meaning that the inflation outcomes of individual months have tended to generate no more than a shrug. After all, monetary policy can do nothing about the past or even for many months ahead, given the lag with which changes in the policy stance take effect.

The problem now, as numerous members of the Governing Council have made clear, is that sustained high inflation increases the likelihood that expectations will disanchor and set in motion a wage-price spiral that the ECB would have a tough time reigning in. The overriding nature of this concern has been reiterated across the hawk-dove spectrum.

Even Banco de España Governor Pablo Pablo Hernández de Cos, one of the most vocal champions of sustained monetary accommodation, has shifted in recent months to acknowledging the threat.

‘On the one hand, the new shock increases the upward dynamics of inflation in the short term and increases the likelihood of second-round effects and thus of pass-through to the medium term’, he said only yesterday, at an event at which he also conceded that March euro area data would show a ‘very significant rise in inflation.’

But de Cos, as previously, also continued to argue that ‘the war will generate a negative impact on growth, which could be very significant’ and ‘could reduce inflationary pressures in the medium term’. And he reassured that ‘[i]n all scenarios analysed, inflation is expected to decline gradually and stabilise at levels close to our 2% target by 2024.’

Perhaps March CPI in his national jurisdiction will heighten his sensibility to the danger. But whether or not someone at the dovish extreme of the Council is ready to rethink things fundamentally, incoming data appears potentially designed to convince at least those still sitting on the fence to get off.

Of course, much depends on what other member states report, and there is little to go on so far. However, the 2.3-point increase in annual March CPI in the German federal state of North Rhine Westphalia underscores the possibility that the area’s largest economy will deliver a further upside surprise later today.

Moreover, renowned German economic research institute IFO reported on the basis of a monthly survey of companies that the index of price-hiking intentions reached a record high this month, a fact that will have alarm bells in the Eurotower ringing even more loudly.

With the next set of staff macroeconomic forecasts only due on June 9, the ECB technically has almost two and a half months to go before next confronting the need to make significant decisions. We wonder whether it will want to wait that long.