Eurozone Inflation Soars To Multi-Decadal High Driven By Surge In Food And Energy Prices

Europe saw its inflation hit the highest numbers since 1985, as it reached five per cent for the month of December. It is a record in the history of the single currency.

Energy prices, a large contributor to inflation recently, went up by 26 per cent in September. However, when compared to November’s 27.5 per cent inflation rate, energy prices have risen at a lower pace. Food product prices, in contrast, went up by 3.2 per cent while industrial goods prices went up by 2.9 per cent. Some of the larger countries such as Germany and Spain continued witnessing higher inflation, but the highest inflation was recorded in Baltic countries in the range of 10-12 per cent. The major factors behind the inflation remain supply chain issues according to the European Central Bank (ECB).

The European Union’s European Central Bank targets a creeping inflation rate of around two per cent per year. Such an inflation rate is healthy as it incentivises consumption over savings, while not drastically reducing purchasing power of consumers. However, the five per cent rate is much higher than the targeted inflation rate leading to talks of possibly hikes in interest rate to arrest inflation.

Since the onset of pandemic struck, the ECB has purchased nearly €2 trillion ($2.3 trillion) in government bonds to shore up the economy and ensure markets are at ease.

However, like the central banks of other countries, the ECB is in no mood to raise interest rates back to normal levels. It believes that inflation is likely to be transitory and hence, an increase in interest rates would be unnecessary.

Executive Board member Isabel Schnabel had said that inflation had already hit the peak in November.

"While remaining very vigilant, we believe that supply difficulties and energy pressures should gradually subside over the course of the year. We should then return not to the low inflation of the past, but to a new inflation regime close to our 2 percent target, with monetary policy normalizing in stages accordingly,” said European Central Bank Governing Council member François Villeroy de Galhau.

Central banks fear that an increase in interest rates could stall increasing economic activity before it becomes self-sustaining. ECB has said that it expects inflation for 2022 to remain below its target of two per cent growth.

In response to growing inflation concerns, ECB said that it would stop net purchases of bonds that it had begun to infuse liquidity in the system in light of the pandemic. The purchases would be stopped by March to slow down the quantitative easing policy. However, interest rates are poised to remain where they are.

Nevertheless, several experts and policymakers remain unconvinced about the claims given that even after excluding volatile items such as fuel and food from the basket, core inflation still remains at 2.6 per cent.

Predictions about energy prices stabilising haven’t worked out too well either. Just before Christmas, natural gas prices almost doubled up to record highs and continued the upward climb as Russian supplies lowered. Analysts who believe than inflation will sustain at higher than two per cent predicted that the tightening of monetary policy should begin in 2023.