After years ofinflation very low, the rise in prices reached its highest level for 13 years. A few months ago, the signals were few. Today inflation is in the headlines. This surge is causing serious concern around the world, including in the euro zone.
According to the latest data from the European Central Bank (ECB), consumer prices in the eurozone have increased by 5.1% in January. This record rise contradicts announced predictions of a slowdown in inflation.
How to analyze this trend?
This increase is mainly due to the soaring energy prices and by theincreased cost of food.
In January, energy prices in the Eurozone increased by a record 28.6% compared to the previous year. At the same time, the growth in the cost of unprocessed food accelerated to 5.2%.
The pandemic and now the easing of restrictive measures provide some answers to this trajectory.
The European economies have reopened. Citizens have regained a taste for travel and have returned to restaurants. After months of confinement they are buying more and spending some of the money they were unable to use at the height of the health crisis.
But logistics can’t keep up with this pace. Businesses are struggling to keep up with rapidly rising demand. They must also rebuild supply chains hard hit by the pandemic.
The container shortage thus makes it more difficult and more expensive to transport goods. Until these hurdles are overcome, companies would have to pass these costs on to their customers, hence higher prices.
oil, gas and electricity have also become more expensive worldwide. Energy prices have risen as hydrocarbon production lags behind consumer and business demand as the pandemic emerges.
How long might this phenomenon last?
The European Commission said Thursday that inflationary pressures are expected to ease next year.
“After hitting a record high of 4.6% in the fourth quarter of last year, inflation in the eurozone is expected to peak at 4.8% in the first quarter of 2022 and remain above 3% until the third quarter. of the year“, indicates the institution in a press release.
“As pressures from supply constraints and high energy prices ease, inflation is expected to decline to 2.1% in the last quarter of the year, before falling below the 2% from the European Central Bank throughout 2023“, adds the Commission.
But uncertainty remains high because the European economic outlook also depends on the geopolitical tensions between Ukraine and Russia but also of the evolution of the pandemic in the world.
Thomas Wieser, economist and former chairman of the Eurogroup task force during the 2008-2009 financial crisis, told Euronews that it is really difficult to predict when inflation will fall below 2%, the ECB objective.
“We do not know it. Our situation is better than that of the United Kingdom or the United States, where the sources of inflation are partially different from those of the euro zone (…). Second, we have no idea when the supply chain issues will start to work themselves out. There are reasons to hope that in the second half it will be much better. And third, the rebalancing of demand between goods and services in our economy will only begin to accelerate when the vast majority of restrictions, including travel restrictions, are lifted. Again, we can be optimistic for the second half, but no one knows. And fourth, we don’t know to what extent a self-sustaining price-wage spiral can develop. If these materialize, I think we have reason to be optimistic that inflation will peak very soon, return closer to the European Central Bank’s target“.
How to cope?
Referring to the growing risks of inflation, ECB President Christine Lagarde did not clearly rule out a rising interest rates later in the year.
“If inflation were to continue, I think there is reason to withdraw the stimulus fairly quickly” in 2022, at the time of Thomas Wieser. “Inflation is bad for those who save. Inflation is bad for those with fixed or relatively stable nominal incomes, which includes many people with pension plans“, he adds.
As the poorest households are the most affected, Guntram Wolff, director of the Bruegel Institute in Brussels, believes at the microphone of Euronews that policy makers must take more courageous measures. “What policymakers can do is, of course, provide support to these households. I would say that this support should not be a reduction in the value added tax on energy, but rather an outright transfer so that they have a little more purchasing power.“
Experts are monitoring developments in Europe and around the world. The transition to the post-pandemic period promises to be delicate. The exit from the health crisis is under the combined threat of financial difficulties and geopolitical tensions.
