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29th Sep 2022

Eurozone inflation hits record, piling pressure on ECB

  • Consumer prices are expected to continue to rise for the rest of the year (Photo: zoetnet)
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Inflation in the eurozone countries rose to another record high in August, putting more pressure on the European Central Bank (ECB) to raise interest rates significantly.

Consumer prices rose to 9.1 percent in the 19 EU members sharing the euro currency, from 8.9 percent in July, Eurostat, the bloc's statistics agency, said on Wednesday (31 August).

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Last year the rate was 2.2 percent, and the ECB's inflation target is two percent.

The highest rates were recorded in Estonia at 25.2 percent, Lithuania 21.1 percent and Latvia with 20.8 percent hikes.

Rates in Belgium, Greece, Spain, the Netherlands, Slovakia, Slovenia were all above 10 percent, Eurostat estimated.

France stands at lowest inflation rate with 6.9 percent, followed by Malta and Finland at 7.1 percent and 7.6 percent respectively.

The EU's largest economy, Germany, meanwhile saw its inflation reach its highest level in almost half a century, at 8.8 percent.

Consumer prices have been on the rise since November 2021, and the August data was the ninth-consecutive record in the eurozone.

Energy costs remained the main driver for the unrelenting price hikes, with an annual rate in August of 38.3 percent compared with 39.6 percent in July.

The price of food, alcohol and tobacco also rose, with a rate of 10.6 percent compared with 9.8 percent in July, with the recent heatwaves and drought in Europe adding to the price increases.

The price of non-energy industrial goods also rose by over five percent — a closely watched indicator as it means that inflation is spreading through the entire economy, not only showing up in the more volatile energy and food prices.

The ECB is expected to announce another rate hike next week, as the eurozone is headed for recession.

Households, spending more on heating, will spend less elsewhere, particularly on services, while energy-intensive industries will also likely limit production, which would add to inflation.

Policymakers are split whether a 75 basis point increase in the deposit rate (which now stands at zero) is called for, while others argue for a more modest increase following July's 50-point move after 11 years of no rate rises.

The bank needs to fight high prices and low growth, often referred to as stagflation, simultaneously, which leaves it with choices that will only hurt Europeans.

Stimulus would fuel inflation, but policy tightening would further slow down the economy.

Europe's economic outlook is bleak, as soaring energy costs are likely to push other prices further, possibly up to 10-percent inflation during the autumn and winter.

The ECB is expected to keep interest rates climbing for the rest of the year, making borrowing tighter for firms and households.

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.

Natural disasters drive inflation, study finds

A new Greenpeace study found natural disasters can cause market prices to swing - both up or down. These 'inflationary pressures' will increase in the coming decades, as natural disasters are expected to become more frequent due to climate change.

Analysis

Can the ECB solve climate change and inflation on its own?

The European Central Bank operates independently - with good reason - but in cases like climate policy more coordination with democratic authorities are needed, two influential economists have argued.

Netherlands tops EU social safety net for the poor

The Netherlands is the only EU state where the minimum income is above the poverty line. A minimum income is not a wage but rather a social safety net to ensure people do not end up destitute.

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