European headline CPI was at 5.8 per cent year-on-year in February, the highest since the inception of the Euro.
This, according to an expert, has underscored the potential stagflation conundrum facing central banks.
Commenting on the upside surprise, GSFM investment strategist Stephen Miller insisted that given its relatively acute dependence on Russia for its energy needs, the potential “stagflationary” consequences of the Ukraine conflict are a particular challenge for the Eurozone and ECB.
“Ordinarily, such inflation outcomes would bring forward any ECB plan to retreat from record levels of monetary stimulus, starting with a potential acceleration of the announced tapering in the Asset Purchase Program (APP) at its next scheduled policy meeting on 10 March, and admitting the prospect of policy rate increases at some stage in 2022,” Mr Miller said.
However, the Ukrainian conflict has thrown a spanner in the work.
“In the wake of the Ukrainian conflict that now looks problematic,” the investment strategist cautioned.
“Even with the announced tapering, the inflation outcomes highlight the dangers of an eschewal of a policy rate increase altogether.”
On Wednesday, the Fed chief gave a reasonably firm indication of a 25bp increase in the policy rate when the Federal Reserve meets on 15-16 March.
While indicating that the Fed would be “proceeding carefully”, Jerome Powell insisted that being careful does not signal an eschewal of policy rate increases altogether.
“Clearly the current circumstance leaves central banks in somewhat of a bind,” Mr Miller said.
He noted that while the Ukraine conflict would ordinarily occasion some degree of caution on the part of central banks, the issue that the bond market needs to contend with is that a more cautious approach to policy now admits the possibility of an even more intractable inflation problem.
“In this circumstance, the terminal policy rate may end up higher as a result.
"While that remains pertinent to the US circumstance, Powell’s comments notwithstanding, nowhere is that conundrum more pronounced than in Europe where once again, the most recent inflation print surprised on the upside by a significant margin.”
Maja Garaca Djurdjevic
Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.
