Sat. Oct 23rd, 2021

Eurozone inflation updates

Inflation in the eurozone has risen to its highest level in almost a decade, increasing pressure on the European Central Bank to slow the pace of bond buying.

Fueled by the region’s recent economic recovery, August’s jump in the harmonized index of consumer prices in the eurozone rose to 3 percent from a year earlier, from 2.2 percent in July. The rise exceeded the expectations of most economists.

Consumer prices have not risen as fast in the 19-nation bloc since November 2011 when the ECB just raised interest rates for the region, the last time it did so.

Prices in August have risen or leveled on an annual basis in each eurozone country. The highest inflation rates of between 4.5 and 5 percent were in Estonia, Lithuania and Belgium. Only four countries in the eurozone now have inflation below 2 percent, compared to 16 countries in March.

Line chart of the harmonized index of consumer prices (annual% change) showing inflation in the eurozone reaches decades high

The price increases were driven by the economic recovery due to the impact of the pandemic, higher energy prices, the reversal of the German value added tax cut and supply chain last year bottlenecks. It also partly reflects last year’s delayed start with summer clothing sales in France and Italy, which were on time this year, so prices are higher in comparison.

The German Bild newspaper rejected the ‘new inflation shock’ in a front-page headline on Tuesday after the inflation rate in the country hit a peak of 13 years.

Over the past year, energy prices have risen by 15.4 per cent, prices of food alcohol and tobacco by 2% and prices of industrial goods have risen by 2.7%. Core inflation, excluding the more volatile energy, food, alcohol and tobacco prices, has more than doubled to 1.6 percent, the highest level since 2012.

Most economists expect inflation to fall again next year as temporary factors fade. But the recent rise in prices continues to offer ammunition to more conservative ECB policy makers: it is expect to push for a delay in the purchase of bonds under its € 1.85 tonne pandemic buying program when they meet next week.

“The effects of reopening and supply problems could increase in the coming months,” said Jack Allen-Reynolds, an economist at Capital Economics. ‘But we suspect that they will fade next year as global consumption and trade patterns return to pre-pandemic norms, and that producers – especially semiconductors – may increase their production.

Allen-Reynolds predicts that the main rate of inflation in the eurozone will fall to around 2 per cent in January and continue to end next year at around 1 per cent.

Investors seem relatively excited about rising inflation, which is usually seen as bad news for bond prices. Yields on 10-year German bonds rose 2 basis points to minus 0.42 percent on Tuesday. Bond yields rise as prices fall.

Inflation is rising in many countries as the world economy declines from the impact of the pandemic, which is increasing pressure on central banks to reverse the monetary stimulus they launched last year. In the US, where inflation is more than 5 percent, Federal Reserve Chairman Jay Powell said last week it will start scaling down its asset purchases this year.

The faster-than-expected rise in inflation will also provide an early test for the ECB new strategy, who unveiled it in July. The central bank raised its inflation target slightly to 2 per cent, saying that although it was willing to tolerate any moderate and transient excess, it promised to maintain a “strong and sustained” policy to hit it.

Salomon Fiedler, an economist at Berenberg, predicted that the ECB would increase its inflation and growth forecasts next Thursday. “This could be the basis for reducing the rate of purchase of bonds under the pandemic emergency purchase program in the fourth quarter, possibly to a rate between that of the first quarter and the faster rate adopted by the ECB thereafter,” he said. he said.

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