ECB is always way too late and too timid. Spectacular failure so far.

Eurozone inflation just hit 4.0% in October, up from 3.8% in September, and the ECB is facing a nasty combination: rising prices and an economy that cannot easily absorb higher borrowing costs. But there is one detail worth watching: this is still largely an energy shock. Energy inflation jumped to 20.8%, while core inflation excluding energy and food came in at 2.5%. The ECB held rates steady on October 29, but Reuters reported that several policymakers now see a December hike to 2.75% as nearly certain unless energy prices suddenly retreat. And the economy has not collapsed yet: third-quarter GDP grew 0.4%, twice the 0.2% forecast. The real question is whether higher energy costs start feeding into wages, services and other prices. If they do, the ECB may have to hike even with growth slowing. If they don’t, one more rate increase could end up doing more damage to an already fragile economy. Would you bet on a December hike, or does the ECB hold its nerve and wait for more evidence?

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