Geopolitical Conflict Ignites European Prices, ECB Officials Warn of Unanchored Inflation Expectations
0xBroomberg
May inflation accelerated across three of the eurozone's big four economies, and ECB officials are openly warning that expectations risk de-anchoring — a June rate hike is now fully priced in, with markets seeing a 92% chance of three hikes this year.
Four economies — who is heating up, who is cooling?
France's May harmonized CPI rose to 2.8% year-on-year, the highest since February 2024 and nearly two-and-a-half times the 1.1% reading in February this year. The main driver: energy prices, especially natural gas.
Italy's May harmonized CPI hit 3.3%, slightly above the 3.2% consensus; core inflation also climbed from 1.6% to 1.8%. Spain came in at 3.6%, in line with expectations, with fuel costs the key push.
In plain terms = prices are picking up speed in all three countries — and it is not just energy. Core inflation is rising too.
Germany's inflation eased — so why isn't the ECB reassured?
Germany's May harmonized CPI came in at 2.6%, down from April's 2.9% and below the 2.8% consensus — the only big-four economy where headline inflation slowed.
But German core inflation rose from 2.3% to 2.5%. Reports say this "offers limited comfort" to the ECB.
This means → the surface cool-down masks deeper pressure. Strip out energy and food, and German price gains are actually widening.
What signal are ECB officials sending?
Dimitar Radev, Bulgaria's central-bank governor and ECB Governing Council member, said in Reykjavik that inflation expectations face a de-anchoring risk: "the cost of acting too late may exceed the cost of acting too early."
He stressed that "monetary policy cannot be the only line of defense," calling on governments to deploy fiscal policy and structural reforms.
Italian central-bank governor Fabio Panetta echoed the hawkish tone: the ongoing Iran conflict and supply-disruption risks "point to a need to recalibrate the monetary-policy stance," though he added that "not being bound by a preset path remains crucial."
What has the market already priced in?
Rate markets have fully priced a 25-basis-point hike at the ECB's June 11 meeting, with two cumulative hikes expected by September and a 92% probability of three hikes by year-end.
If delivered, this would be the ECB's first rate increase since 2023.
This reflects a market consensus that has already converged: the question is not *whether* to hike, but *how fast*.
What clues are buried in the meeting minutes?
The April minutes show some members said that if a hike had been on the agenda, they "would not have objected to raising rates at that meeting" — internal hawkish consensus is building.
The ECB's consumer survey shows one-year inflation expectations jumped from 2.5% in March to 4% in April; five-year expectations edged up from 2.3% to 2.4%.
Put simply = short-term expectations have already swung far above target. Long-term expectations are still near 2% — but that is exactly the tipping point the ECB fears most. Once long-term expectations start drifting too, the cost of taming inflation multiplies.
Content is for reference only, not financial advice.