Alarm bells ring after Eurozone inflation reaches new record high. 

The eurozone’s inflation rate hit a new high this month, alarming the ECB. According to Eurostat data released on Friday, inflation in the 19-country currency bloc jumped to 7.5 percent in April from 7.4 percent in March. Food, services, and non-energy industrial items all increased in price, indicating that inflation is becoming more broad-based. 

The ECB is worried about rising inflation and the end of a nearly decade-long battle with ultra-low price rise. The ECB-monitored inflation rate excluding food and fuel increased to 3.9 percent from 3.2 percent, while a narrower measure excluding alcohol and tobacco increased to 3.5 percent from 2.9 percent.

Both statistics surpassed expectations. Even if the conflict dampens confidence and threatens to drive growth into negative territory this quarter, the ECB is expected to decrease assistance to the economy further when policymakers meet on June 9. It will stop buying bonds in July and then consider raising rates in the third quarter, with a second rate rise forecast before year’s end. 

Many policymakers are worried about the ECB’s capacity to regulate prices and eventually deliver on its mission since long-term inflation expectations are increasing far beyond its 2% objective. Long-term inflation forecasts jumped to 2.5% on Friday, while certain survey-based indicators are currently above 2%. The markets now expect three to four rate rises this year, bringing the ECB’s -0.5 percent deposit rate back into positive territory for the first time since 2014. 

The French inflation rate unexpectedly jumped to a new high in April. While eurozone bond rates climbed off session lows, Germany’s benchmark 10-year yield fell 2 basis points to 0.88 percent by 07:32 GMT, compared to a 9-bps spike on Thursday on German data. 

In addition to skewing expectations upward, the publication showed that markets are still vulnerable to upside surprises, according to ING analysts. 

“Despite renewed volatility in energy markets, the focus should increasingly be on core measures to assess how much the energy-related jump is feeding into other components.”

Bond yields have risen considerably this year due to inflationary pressures and hawkish central bank signals. The benchmark 10-year German bond yield is rising 33 bps for the seventh month in a row. 

Italy will auction five- and 10-year fixed-rate notes, as well as a seven-year floating-rate bond, to raise up to 8 billion euros. It comes as Italy’s debt, a major beneficiary of ECB support, is under pressure. 

Since April 2020, the risk premium Italy pays on 10-year debt over Germany has grown by 35 basis points. The 10-year yield rose 67 bps, the most since May 2018. On Friday, Italy’s debt outperformed modestly, and the risk premium was 180 bps, down from around 183 bps in June 2020.