Euro zone inflation fell less than expected last month and underlying price growth surged, reinforcing the case for the European Central Bank to keep raising interest rates at a brisk pace, data from Eurostat showed on Thursday.
The ECB has promised another half-percentage-point rate hike for March 16 to fight inflation, but grim data is already shifting the debate to subsequent meetings as markets continue to raise their bets on just how high the ECB will need to go.
Investors now see the ECB's 2.5% deposit rate rising by a combined 100 basis points in March and May, then to around 4.1% at the turn of the year, with markets having priced in an extra 50 basis points of hikes in the past month alone. Price growth in services, the biggest component in core inflation, accelerated to 4.8% from 4.4%, a big worry since the sector is especially sensitive to wage growth and the rise suggests an acceleration in labour costs.
"High wage increases could imply that especially service price inflation could remain elevated in 2023-2024," Nordea analysts said in a note. "Given that the weight of services in the headline inflation is 44% and in core inflation 62%, elevated service price inflation will keep also the aggregate level inflation high."
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