EUROZONE INFLATION SETTING NEW RECORDS - Tanishk Shukla

 

Inflation in the Eurozone's 19 members accelerated in December, with consumer prices up 5% from a year earlier. Since the Eurozone was founded two decades ago, headline inflation has been at an all-time high. In comparison to the previous month, prices were up 0.4 percent. Furthermore, when volatile food and energy costs are eliminated, core prices rose 2.6 percent year over year in December, a new high. In comparison to the previous month, core prices increased by 0.4 percent. The key reason for the disparity between headline and core inflation was the 26 percent yearly increase in energy prices. Germany had 5.7 percent annual inflation, France had 3.4 percent, Italy had 4.2 percent, Spain had 6.7 percent, the Netherlands had 6.4 percent, Belgium had 6.5 percent, and Ireland had 5.7 percent. The reversal of the pandemic-related cut in the value-added tax has contributed to Germany's extremely high inflation rate (VAT). The government of the eurozone's largest member decreased its VAT rates for six months in July 2020. This meant that from July 2021 onwards, consumer prices were being compared to artificially low prices from a year prior, exacerbating inflationary pressures. That is no longer the case, as tax rates were reduced to pre-pandemic levels at the beginning of 2021. But the outlook thereafter is less clear, with supply-chain blockages and uncertainties about the supply of natural gas from Russia having proved longer-lasting than economists or policymakers had expected.

According to the European Central Bank, the inflation spike will be brief as energy price increases fade next year. The bank's mission is to manage inflation at or below 2%. Until now, Christine Lagarde, the ECB's governor, has claimed, like most central bank governors, that inflationary pressures would be transient and would likely begin to diminish in 2022. Despite the advent of the Omicron version of Covid-19 and its potential to impede recovery from the pandemic, Hepworth predicted that this stance would be tested. "It may be wishful thinking on Lagarde's part when she declares that price pressures will not spiral out of control — they have already done so, and it's difficult to see how they will subside any time soon," he said. The eurozone's core inflation rate, which excludes potentially volatile commodities such as alcohol, energy, food, and tobacco, jumped to 2.6 percent in November from 2% in October. The strength of growing core prices over the ECB's 2% target, according to several analysts, indicated that the headline inflation rate was already having secondary impacts due to higher pay demands.

 "Although the E.C.B. has stated that it sees current price pressures easing in 2022, and our baseline is that monetary policy will remain accommodative," Katharina Koenz, an economist at Oxford Economics, wrote in a note to clients, "the latest data will add to the debate on the appropriate level of policy support."

“However,” she added, “there isn’t much  E.C.B. can do about higher energy prices and supply bottlenecks in the short term anyway.”