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25th Sep 2022

European inflation hits 25-year high, driven by energy spike

  • The Russian invasion of Ukraine has disrupted energy and food markets, causing prices to spike (Photo: Emilio Morenatti)
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The annual inflation rate in the 27-country European Union was 9.8 percent in July, figures released by the EU's statistics agency showed on Thursday (18 August), while inflation in the 19 member states using the euro hit 8.9 percent.

It is the highest inflation rate reported since 1997, when Eurostat started recording statistics.

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Countries most affected by high inflation are Estonia (23.2 percent), Latvia (21.3 percent) and Lithuania (20.9 percent), which have had to replace sanctioned trading goods from neighbouring Russia with EU or overseas imports.

Dissecting the drivers of inflation, the statistics agency found high energy prices and food contributed the most to the overall inflation rate in the eurozone, at 4.02 and 2.08 percent, respectively.

Russian state gas company Gazprom has reduced its supply to Europe, with exports this year falling 36.2 percent.

This has driven up gas prices in Europe, with Gazprom recently saying gas prices could spike by a further 60 percent this winter.

Threatened by ever-increasing prices and a possible Russian gas cutoff this winter, European countries have agreed to fill up existing gas storage to at least 80 percent capacity by 1 November.

EU gas buyers have almost reached this level, but have had to outspend Asian gas buyers in an effort to attract scarce overseas Liquified Natural Gas (LNG).

Benchmark gas prices reached €230.05 per megawatt hour on the Dutch TTF gas hub, ten times more than a year ago.

Inflation and high energy prices are wreaking havoc on European businesses and industries.

The German economy, Europe's industrial heartland, stagnated in the second quarter due to energy price rises and supply chain disruptions, the finance ministry said in its August monthly report, published on Friday.

High energy prices have also forced Romania's biggest chemicals company Chimcomplex to suspend operations.

In an effort to protect households and businesses against high energy prices, France recently announced an additional €25bn spending package, which included a cap on gas and electricity prices in the country.

Although costly, the measures are widely-credited with keeping inflation levels in the country low, which at only 6.8 percent are the lowest in Europe.

Global consequences

With Europe driving up prices, gas is becoming too expensive in other parts of the world.

In early summer, Pakistan was unable to complete a single LNG tender and is now triggering rolling blackouts and boosting power bills because it can no longer secure enough fuel.

Sri Lanka is negotiating a bail-out with the International Monetary Fund as high gas prices set off massive public protests that led to the ouster of president Gotabaya Rajapaksa last month.

With gas prices expected to remain high for the foreseeable future, some high-profile gas projects in Asia have also been cancelled.

Last week, the Bangladeshi government announced the cancellation of two large gas-fired powerplants, as campaign groups and researchers in the country continue to make a case for cheaper renewables.

Russia cuts Nord Stream 1 gas to 20% capacity

It comes a day after EU governments approved a watered-down plan to curb gas demand by 15 percent, aimed at lowering consumption, building storage, and sharing supplies if Russia in future cuts all exports.

Analysis

An inflation surge, but (some) economists warn on raising rates

Rising prices have fuelled the debate among economists about inflation risk - with some arguing that central banks should increase interest rates, while others urge governments and central banks to adopt more precise and targeted measures.

EU now mulling options to reduce electricity demand

The EU mulls measures to cut electricity demand, as part of its efforts to tackle skyrocketing energy prices, after focusing efforts on reducing gas consumption amid concerns that Russia could further curb gas flows.

Von der Leyen unveils energy crisis plan ahead of key meeting

The new energy plan includes a mandatory target to reduce peak electricity consumption, a cap on excess revenues by renewables and nuclear firms, a solidarity mechanism to channel fossil fuel companies' profits to citizens, and a temporary state aid framework.

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