Euro zone record inflation of 4.9% puts pressure on ECB

Inflation in the eurozone rose to 4.9% in November, a record high since the single currency was created more than two decades ago, prompting policymakers and economists alike. warned that the price pressure is likely to last longer than expected.

Driven by higher energy prices, the rise in eurozone inflation – as measured by the harmonized index of consumer prices – far outstripped the average of 4.5% polled by economists. Reuters monitoring. The increase is likely to put more pressure on the European Central Bank to reduce its monetary stimulus.

Some investors said the ECB appeared to be too comfortable about raising prices. “Maybe it is a wishful thinking on the part of the ECB president [Christine] Lagarde when she stated that price pressures won’t get out of control – they’ve already happened and it’s hard to follow the argument that it will ease soon,” said Charles Hepworth, chief investment officer at GAM Investments. .

Consumer prices in Germany increased by 6%, the fastest increase in nearly 30 years, causing political instability. Germany’s upcoming finance minister Christian Lindner wrote on Twitter on Tuesday that “inflation raises legitimate concerns”, adding: “In the event of a currency devaluation, we will see how it develops post-pandemic.”

Line chart of the Harmonized Consumer Price Index (% change year-on-year) shows eurozone inflation hitting a new record

The ECB tried to assuage worries about rising prices by citing many one-time causes of inflation, such as soaring energy prices, supply chain bottlenecks and the reversal of sales tax cuts. German goods will disappear next year.

While the rise in coronavirus cases and the spread of a new variant are causing more uncertainty in the economy, there are signs that ECB officials doubt whether inflation will fall as quickly as they do. think or not.

“In 2022, the bottlenecks may last longer than expected,” said Luis de Guindos, vice president of the ECB, in an interview with Les Echos published on Tuesday. “There is a risk that inflation will not fall as quickly and as much as we anticipated.”

Energy prices rose 27.4 percent in November from a year earlier, the biggest driver of inflation in the 19 countries in the bloc. But prices for food, services and goods all rose faster than the ECB’s 2% target.

Core inflation, which the ECB tracks underlying pressures because it removes volatile energy, food, alcohol and tobacco prices, rose to 2.6%, up from 2% a month earlier. .

Some of the reasons for the increase in service prices were the change in the share of package holidays to a lower weight in the official inflation basket to reflect the drop in tourism during the pandemic.

But Neville Hill, chief European economist at Credit Suisse, said: “It is the first evidence that inflationary pressures are mounting from factors that could be attributed to supply bottlenecks and the pandemic. . . That should make a lot of people at the ECB worried that some of the current strength in inflation will persist.”

Economists are struggling to gauge the inflationary impact of a record increase in coronavirus cases and the spread of Omicron variant in Europe.

The variant is likely to reduce overall inflation due to falling oil prices but could push up commodity prices by adding to the chain log, said Jack Allen-Reynolds, senior Europe economist at Capital Economics. supply generated by the pandemic.

The ECB will release a new inflation forecast on December 16th and many are looking forward to it to increase them from announcements issued in September, when it predicted eurozone annual inflation would fall from 2.2% this year to 1.7% next year and 1.5% in 2023 .

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