Financial basis

Eurozone inflation hits 13-year high, deepening ECB headache

FRANKFURT (Reuters) – Eurozone inflation hit a 13-year high last month and is expected to rise further, further clouding the European Central Bank’s benign view of the biggest price spike since before the global financial crisis .

FILE PHOTO: A man shops in an outdoor market as the government must announce tighter restrictions on coronavirus disease (COVID-19), in Rome, Italy, March 12, 2021. REUTERS / Yara Nardi

Consumer price inflation in the 19 euro-sharing countries accelerated to 3.4% year-on-year in September, from 3% a month earlier, the highest figure since September 2008 and just ahead analysts’ expectations of 3.3%, according to data from Eurostat, the EU’s statistical agency shown on Friday.

Prices have increased mainly due to a surge in energy costs, mainly a reversal of the fall in oil prices that occurred during the COVID-19 pandemic, but the impact of bottlenecks production and shipping was also evident, with durable goods prices rising 2.3% from August.

With soaring natural gas prices and bottlenecks affecting everything from automobile production to computer manufacturing, inflation could reach 4% by the end of the year, or double the l target of the ECB, before the bank expects a relatively rapid decline in early 2022.

But supply chain disruptions appear to be getting worse, increasing the chances of the inflation bump seeping into underlying prices and creating more permanent pressures as companies adjust their pricing policies and of wages.

For now, the ECB is sticking to its narrative that this inflation surge will pass quickly and then price growth will linger below its target for years to come, requiring depressed borrowing costs. .

But ECB President Christine Lagarde took a more cautious tone this week, pointing to increased inflation risks, although she called for patience and warned of overreacting.

Meanwhile, market economists are changing their minds, arguing that central banks may underestimate the risk of inflation.

“We think there is a good chance that this inflation will be less transient than all central banks, including the ECB, suggest,” said BNP Paribas economist Luigi Speranza.

“Consumers can start demanding higher wages and businesses can accommodate them, on the basis that they could pass on higher costs through higher end prices.”

Underlying prices, closely watched by policymakers as they filter volatile food and energy prices, also accelerated in September.

Core inflation excluding food and energy fell from 1.6% to 1.9%, as did a narrower measure that also excludes alcohol and tobacco.

Although increasingly nervous about inflation, ECB policymakers are likely to err on the side of caution after the bank has exceeded its target for nearly a decade.

He said he was prepared to overshoot temporarily to ensure inflation is really back on target, as tackling weak price growth has required unprecedented efforts, especially in interest rates. deeply negative and trillions of euros in asset purchases.

Still, with its € 1.85 trillion emergency pandemic stimulus package set to expire next March, a slight tightening of ECB policy is likely in the coming months.

Report by Balazs Koranyi; edited by John Stonestreet


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