Eurozone inflation could move back above 3%
Markets are heading into the latest eurozone CPI release with inflation risks building again. According to the Spanish source analysis, Germany and Spain are already showing signs of renewed upside pressure, and consensus for the broader euro area points to headline CPI moving back above 3.0%, a level not seen since late 2023.
That matters because the eurozone economy is not entering this data release from a position of strength. Growth remains soft, business activity is uneven and consumers are still sensitive to higher prices. If inflation rises again while demand stays weak, investors may start to see the next ECB decisions less as a normal tightening cycle and more as a policy response to a stagflation problem.
The ECB may be caught between sticky prices and weak growth
The ECB is already leaning towards another rate increase, with euro short-term rate swaps still pointing to a high probability of a 25-basis-point move at the 11 June meeting. But a stronger inflation print would not necessarily be a straightforward positive for the euro if it comes alongside a weakening growth backdrop.
That is the heart of the stagflation dilemma. Higher inflation may justify tighter policy on paper, yet if the economy is losing momentum at the same time, the ECB has less room to look convincingly hawkish. Markets may start to question how far rates can really go before policy tightening itself becomes part of the growth problem.
