New inflation record in the euro zone, the worst is yet to come – 04/01/2022 at 14:00



FRANKFURT (Reuters) – Euro zone inflation hit a new all-time high in March and is expected to rise further in coming months on rising energy prices, making things even more difficult for the central bank. European Union (ECB), forced to react simultaneously to rising prices and slowing growth.

The consumer price index calculated according to European standards (IPCA) increased by 7.5% annually after +5.9% in February, a figure well above expectations as economists and analysts polled by Reuters forecast a figure of “only” 6.6%.

Energy prices increased by 44.7% compared to March 2021, compared to +32.0% in February. Those of food, alcohol and tobacco increased by 5.0% in one year, those of industrial goods without energy by 3.4% and those of services by 2.7%, specifies Eurostat.

All figures above the 2% inflation target set by the ECB.

Beyond energy and food prices, which are often volatile, underlying inflation has also accelerated, which risks favoring the “anchoring” of high inflation, a mechanism that is difficult to combat once which is activated.

The inflation rate without energy or unprocessed food thus stands at 3.2% per year compared to 2.9% the previous month. An even narrower measure, which also excludes alcohol and tobacco, rises 3.0% after +2.7%.

Inflation in the euro zone is “very high”, admitted Philip Lane, chief economist at the ECB, but the latter must take its time to analyze these figures.

“We have the energy price shock, the prospect of spillovers driving inflation,” he said in an interview with CNBC.

“On the other hand, deteriorating sentiment, the fact that real incomes suffer from high energy prices, especially on a one-to-two-year horizon, will put negative pressure on the inflation outlook,” he added.


A sharp rise in prices is usually a handicap for growth and the ECB expects it to have been slightly positive in the euro zone in the first quarter and close to zero in the second, weighing the increase in the energy bill on both the consumption of households as on business investment.

Such a scenario would threaten the region with “stagflation,” an economic situation that combines high inflation and stagnant activity.

The ECB can certainly hope that the drop in energy prices will bring down inflation in the second half of the year, but such a drop in a context of anemic growth could have perverse effects by causing price growth to fall below its objective.

In any case, in the immediate future, the central bank cannot ignore the exceptionally high level of inflation, especially since it only foresees a peak in three or four months and that the tensions in the labor market (the unemployment rate reached an all-time low in February ) raise fears of upward pressure on wages.

The institution headed by Christine Lagarde must also ensure its credibility, undermined last year by its long-reaffirmed discourse on the “temporary” nature of rising inflation.

Therefore, it should tighten its monetary policy as cautiously as possible. While financial markets are currently anticipating a 63 basis point hike in key interest rates by the end of the year, decisions by the ECB’s Governing Council could be much more limited.

An excess of caution on the part of the ECB could force it, if the price increase continues, to tighten its monetary policy more quickly thereafter.

“The inflation figures speak for themselves,” Bundesbank President Joachim Nagel said. “Monetary policy should not miss the opportunity to take timely countermeasures.”

The central bank governors of Austria and the Netherlands, which are among the most conservative members of the ECB, have repeatedly advocated rate hikes this year to prevent a general rise in prices.


(Balazs Koranyi report, French version Marc Angrand, edited by Matthieu Protard)

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