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A strong German inflation report on May 30 prompted the European Central Bank (ECB) to consider raising interest rates for the first time since 2009. On May 30, the United States commemorated Memorial Day. Despite this, the stock market has had enough to keep it busy. 

On May 30, European Union leaders decided to put new limitations on Russian exports, particularly on their seaborne oil, during a meeting in Brussels. In the meanwhile, pipeline supplies have been exempted for those countries that need them the most. The WTI futures contract was over US$ 118 bbl and the Brent futures contract was above US$ 123.

Treasury rates rose throughout the Asian morning, reversing previous advances in the stock market and bolstering the US currency. This according to analysts will have a drastic effect on the investors’ sentiments. So far this week, the yield on the benchmark 10-year note has risen by 10 basis points, to 2.84 percent at the time of this writing. 
 

How Do Things Develop?

Jobless claims were lower than predicted, at 2.5 percent, while retail sales were steady at 0.8 percent for the month of April. Because of that, it’s most likely that the U.S. economy will start to recover soon from the damage of the increased inflation rate. Unhappiness quickly set up after an enormous blip in industrial output. An example of this is the following. Instead of the -0.2 percent expected, it came in at -1.3% for the month of April. 

As a result of these developments, the yen fell against the dollar, putting pressure on Japan's energy-importing economy. After that, China's PMI data was released, and although the figures were better than expected, they still indicated a contractionary outlook. For the month of May, the Chinese manufacturing PMI came in at 49.6 instead of 49.0, while the non-manufacturing PMI was 47.8 instead of 45.5. 

On the same day as that publication, the market received a slew of disappointing Australian construction permits. It was predicted to rise by 2.0 percent month-on-month in April, but it actually fell by 2.4 percent. European GDP, CPI, and employment figures are being revealed in a swath across the continent today. In addition to GDP, the latest Conference Board consumer confidence data will be released for the United States and Canada.
 

The EU Inflation Reaches The Record High

According to preliminary Eurostat statistics, the cost of living problem in the Eurozone worsened in May to a new record high of 8.1 percent from 7.4 percent in April, which caused concerns among the European countries and people. 

The ECB's 2% inflation objective has now been exceeded by a factor of four. There was a 39.2 percent rise in energy prices and a 7.5 percent increase in the cost of food, alcohol, and cigarettes, compared to a 6.3 percent increase in April. This is one of the highest rates that the European zone has had since the crisis of 2008. 

Because of Russia's conflict in Ukraine, these components have risen in importance. So far, the ECB has indicated that it would begin increasing interest rates only in July, in small increments. According to Italian Governing Council member Ignazio Visco, "given the uncertainties of the economic future, the raise will have to take place gradually."

There is no need to raise rates more than 25 basis points, according to the European Central Bank's top economist Philip Lane on May 30. The first significant rise in rates during a decade is expected at the July and September policy sessions of the central bank. On the other hand, Lane added, "Normalization has a natural concentration on moving in increments of 25 basis points," which would compel the central bank to change its medium-term inflation forecast more significantly. 

A gradual approach to normalization is recommended based on "our present assessment of the situation, where we believe the medium-term inflation forecast is in line with our 2% objective." However, as external price shocks diminish, the faith that high inflation is really a transitory blip is beginning to show cracks. Food, energy, alcohol, and tobacco were excluded from the calculation of core inflation in May's report, which rose from 3.5 percent in April to 3.8 percent. 

Domestic price pressures and foreign price shocks may be seen in core inflation, which is regularly monitored as a crucial indicator. Workers may demand greater pay in order to keep up with rising costs, which might lead to further pressure on the government. A price-wage spiral occurs when salaries rise rapidly in reaction to rising prices, and this, in turn, leads to even greater inflation, as the European Central Bank (ECB) has maintained.

So what does the future hold? Because of the hard geopolitical conditions around the world in terms of the Russia-Ukraine war, there are many countries that struggle economically. Because of the imposition of sanctions on Russia, many countries started to deny building crude oil from Russia, which has resulted in increased prices. In addition, these sanctions have increased the prices of several products. Nowadays many countries fight against the gradually increasing inflation rate. It’s possible that this situation may lead the world to a new economic crisis.