NEW RECORD FOR INFLATION IN THE EUROZONE, THE WORST IS TO COME
FRANKFURT (Archyde.com) – Euro zone inflation hit a new record high in March and is expected to pick up further in the coming months due to soaring energy prices, making it more difficult for the European Central Bank (ECB), forced to react simultaneously to rising prices and slowing growth.
The consumer price index calculated by European standards (HICP) rose by 7.5% on an annual basis following +5.9% in February, a figure well above expectations since economists and analysts polled by Archyde.com forecast a figure of “only” 6.6%.
Energy prices jumped 44.7% compared to March 2021, once morest +32.0% in February. Those of food, alcohol and tobacco increased by 5.0% in one year, those of industrial goods excluding energy by 3.4% and those of services by 2.7%, specifies Eurostat.
All figures higher than the 2% inflation target set by the ECB.
Beyond energy and food prices, which are often volatile, core inflation has also accelerated, which risks favoring the “anchoring” of high inflation, a mechanism that is difficult to fight once it’s engaged.
The inflation rate excluding energy and unprocessed food thus stands at 3.2% over one year once morest 2.9% a month earlier. An even narrower measure, which also excludes alcohol and tobacco, is in increase of 3.0% following +2.7%.
Inflation in the euro zone is “very high”, admitted Philip Lane, the chief economist of the ECB, but the latter must take the time to analyze these figures.
“We have the energy price shock, the prospect of second-round effects pushing inflation higher,” he said in an interview with CNBC.
“On the other hand, the deterioration in sentiment, the fact that real incomes will suffer from high energy prices, especially at a horizon of one to two years, will exert negative pressure on the inflation outlook” , he added.
THE ECB WANTS TO AVOID “STAGFLATION”
A sharp rise in prices is often a handicap for growth and the ECB expects this to have been slightly positive in the euro zone in the first quarter and close to zero in the second, the increase in energy bills weighing on both household consumption and business investment.
Such a scenario would threaten the region with “stagflation”, an economic situation combining high inflation and stagnation of activity.
The ECB can certainly hope that the relapse in energy prices will bring down inflation in the second half of the year, but such a decline in a context of anemic growth might have perverse effects by causing the rise in prices to fall below its target.
In the immediate future, the central bank cannot ignore the exceptionally high level of inflation anyway, especially since it only foresees a peak in three or four months and that the tensions on the labor market ( the unemployment rate reached an all-time low in February) raise fears of upward pressure on wages.
The institution chaired by Christine Lagarde must also ensure its credibility, undermined last year by its long-reaffirmed speech of the “temporary” nature of the inflationary surge.
It should therefore tighten its monetary policy as prudently as possible. While the financial markets are currently anticipating a 63 basis point rise in key rates by the end of the year, the decisions of the ECB’s Governing Council might be much more limited.
Excessive caution on the part of the ECB might force it, if the rise in prices continues, to tighten its monetary policy more quickly therefollowing.
“The inflation figures speak for themselves,” said Bundesbank President Joachim Nagel. “Monetary policy should not miss the opportunity to take timely countermeasures.”
The governors of the central banks of Austria and the Netherlands, among the most conservative members of the ECB, have repeatedly advocated rate hikes this year to avoid a general rise in prices.
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(Report Balazs Koranyi, French version Marc Angrand, edited by Matthieu Protard)
