Inflation expectations in the eurozone reached their highest level in years

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By Saikat Chatterjee and Abhinav Ramnarayan

LONDON (Reuters) – Eurozone bond investor inflation expectations reached their highest level in years on Friday, putting additional pressure on the European Central Bank and its insistence on holding on to the crisis-era stimulus packages.

The shortage of labor, fuel, cargo ships, semiconductors and building materials as the global economy recovers from pandemic lockdowns has led companies from electric car makers to chocolatiers to cut costs.

Some of the world’s biggest brands are now passing higher prices on to consumers, warning all policymakers sitting on the inflation fence that things will get worse.

The German 10-year breakeven inflation rate, which represents the difference in yield between a nominal bond and its inflation-indexed counterpart, rose to around 1.81%, the highest level since April 2013.

A similar rate in the United States was 2.64%, its highest level since August 2006.

“It is also noticeable that these higher inflation expectations are not only concentrated on the next few years of the time horizon, but have also seen the 5y5y inflation swaps, which consider the expectations for the five-year period from five years, increased significantly,” said the chief strategist of Deutsche Bank , Jim Reid.

He was referring to the five-year, five-year forward inflation swap, an important market indicator for long-term inflation expectations in the Eurozone, which reached 1.9489% on Friday, its highest level since September 2014.

Global supply chain issues in reopening the world economy after COVID-19 lockdowns and labor shortages have added price pressures. But unlike some other big central banks like the US Federal Reserve and the Bank of England, policymakers in the single currency bloc have yet to signal clearly that they would withdraw pandemic-era incentives.

Rising inflation expectations also pushed nominal bond yields higher, with Italy’s 10-year government bond yields hitting 0.973%, their highest level in five months.

Later on Friday at 0800 GMT, Markit’s first purchasing managers’ index (PMI) for the Eurozone’s services and manufacturing sectors is due to be released, a key corporate survey that shows the health of the economy.

A Reuters poll showed that expectations are for a composite value of 55.2, where 50 is the level that separates contraction from expansion.

(Reporting by Saikat Chatterjee and Abhinav Ramnarayan; Editing by Emelia Sithole-Matarise)


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