Eurozone Inflation Hits Record 4.9%, Prices in Germany Rocket 6%

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Eurozone inflation has hit its highest level since the introduction of the single currency, at 4.9%. The news follows the German inflation rate hitting 6% yesterday.

The elevated inflation readings pose a problem for the European Central Bank and its stimulus programmes. The ECB has been criticised for being out of sync, with the thinking of other central banks that pre-omicron were already starting to tighten monetary policy and rollback stimulus programmes.

Eurozone harmonised consumer inflation index has beaten all the forecasts from analysts, which were expecting a 4.5% reading.

The harmonised index is so-called because the method of measurement of price increases for the basket of goods and services in the index is the same for all the 19 countries of the bloc.

For now ECB president Christine Lagarde remains attached to the notion that inflation is transitory, but that line is proving harder to sustain as citizens contend with a rising cost of living.

Supply chain dislocation and high energy prices may not be temporary

But the supply chain disruptions do not look like they are going to go away anytime soon, with components such as energy possibly entering a period of secular growth in prices.

Energy prices account for a large part of the inflation in the eurozone, as they do elsewhere, with prices up 27.4% from a year earlier.

The ECB’s target rate for inflation is 2%. It’s governing council meets on 16 December and will bring to an end the pandemic emergency purchase programme (PEPP). The ECB is also yet to decide if and when to start reducing its regular bond purchase programmes.

Pressure is mounting in Germany, where inflation is a highly sensitive issue given the country’s history of having once suffered hyper-inflation.

Bundesbank President Jens Weidmann is more on the hawkish side of the argument at the ECB. He thinks it likely that the inflation rate for the eurozone will remain above the target over the medium term.

Omicron variant complicates picture for policymakers

In the dovish corner is Pablo Hernandez de Cos at the Spanish central bank who favours keeping monetary policy loose for longer. His view may be getting a stronger hearing after the emergence of the omicron variant of the Corona virus. Inflation is Spain is also running hot, at 5.6%.

ECB forecast expect inflation to moderate by the second half of next year and to back below target by 2023, at 1.5%

Europe was also in the throes of a fourth waver of the Covid pandemic as the Delta variant lets rip across the continent, leading to the reimposition of restrictions in the Netherlands and Germany with full blown lockdowns in Austria and Slovakia.

Although the negative impact of a resurgence of the Covid pandemic would knock growth, it would not necessarily moderate inflation because it could add to the supply chain dislocation that has been responsible for the shortages that have helped drive up inflation in certain sectors.

On that, ECB Vice President Luis de Guindos said: “There’s a risk that inflation will not go down as quickly and as much as we predicted.”

About Gary McFarlane PRO INVESTOR

Gary was the production editor for 15 years at highly regarded UK investment magazine Money Observer. He covered subjects as diverse as social trading and fixed income exchange traded funds. Gary initiated coverage of bitcoin and cryptocurrencies at Money Observer and for three years to July 2020 was the cryptocurrency analyst at the UK's No. 2 investment platform Interactive Investor. In that role he provided expert commentary to a diverse number of newspapers, and other media outlets, including the Daily Telegraph, Evening Standard and the Sun. Gary has also written widely on cryptocurrencies for various industry publications, such as Coin Desk and The FinTech Times, City AM, Ethereum World News, and InsideBitcoins. Gary is the winner of Cryptocurrency Writer of the Year in the 2018 ADVFN International Awards.