Ign-EU-rance Is Bliss

Image source: Yuriy Golub - Shutterstock

What's going on?

Fresh data out on Tuesday showed eurozone inflation hit its highest in a decade in August, but the European Central Bank (ECB) maintains there’s absolutely nothing to see here.

What does this mean?

The prices of goods and services in Europe’s 19 euro-spending countries climbed by a higher-than-expected 3% last month compared to a year before. That was the biggest jump since 2011, and a notable bump from the 2.2% of the month before. The usual suspects were to blame: rising energy prices and a strong rebounding economy that’s increasing demand for just about everything, all while suppliers struggle to keep up. Throw in a boost in demand in Germany following a temporary tax cut in the second half of last year, and it’s no surprise prices are ticking up so fast.

Why should I care?

The bigger picture: Get with the times, ECB.
This is the second time inflation has overshot the ECB’s new target of 2% this year, but you wouldn’t know it: the central bank is still insisting that a spike in prices is a temporary consequence of the pandemic, and it’s sticking to its current policies of ultra-low interest rates and substantial monthly bond purchases. That, even as the US Federal Reserve hinted last week that it’ll be tapering its bond-buying program before the end of the year.

For markets: Are you sitting comfortably?
If the ECB does start slowing down its bond-buying program earlier than expected, it’ll remove a major source of demand for European bonds, driving down their prices and pushing up their yields. It could have a knock-on effect on the stock market too, with investors tempted to rotate out of stocks and into bonds with now-more-attractive returns. And considering an index of major European stocks has just posted its longest winning streak since 2013, there could be a long way to tumble if they do…

Originally posted as part of the Finimize daily email.

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