Euro Zone Inflation Surges Due To Surge In Energy And Services Price Boost

Consumer inflation in the euro zone increased in May as had been expected by economists because of a sharp surge in energy prices as well as more expensive services, according to data released on Thursday which pushed the pace of growth in prices to just beyond the target set for the economy by the European Central Bank.

Consumer inflation in the 19 countries sharing the euro increased by 0.3 per cent month on month, which was equivalent to a 2.0 per cent year on year rise as had been estimated earlier, showed data released by the European Union’s statistics office Eurostat. The inflation target set by the ECB is at below but close to 2 per cent.

1.19 percentage points to the overall year on year figure was added by the spike in energy prices in May while a 0.45 percentage points to the number was added by price hike in services. Food, alcohol and tobacco added 0.15 percentage points.

If the most volatile components of energy and food, elements that the ECB calls the core inflation, the surge in prices in May was at 0.2 per cent on the month on month basis and only 0.9 per cent year on year.

Economists are of the opinion that the overall inflation rate for the entire year in the euro zone would get even higher and to be at around 2.5 per cent as the economy recovers from a double-dip recession it suffered because of the Covid-19 pandemic as well as because of the addition to price pressures because of the recent increase in global commodity prices.

However despite the more than targeted surge in inflation, the ECB is of the view that the inflation surge is a temporary phenomenon as a consequence the central bank has pledged to keep its monetary policy loose as it expects the fading away of the drivers of price growth early next year and for inflation to come down to below target for years to come.

Till April this year, some form of lockdown measures to curb the spread of a second wave of the Covid-19 pandemic was in place in many euro zone countries. That resulted in a significant downward pressure on the prices for services which make up anywhere between 80 and 85 per cent of the total economic output of most countries in the zone. Because of the consumer-facing nature of their economies, most of such countries had been the most affected by lockdowns throughout the pandemic.

But according to Oxford Economics, the rate of inflation will remain high in the coming months with consumers returning to the market and result in a boom in consumption.

“Encouragingly, services inflation picked up to 1.1% from 0.9% in April, and based on recent price expectations data should keep recovering over the coming months. While core inflation ticked up to 0.9% in May, this was driven entirely by a rise in core inflation in Germany. Underlying price pressures remain weak,” said analysts.

“At the same time, backlogs and price pressure metrics hit record levels in eurozone’s south as well. This solidifies our view that easing of the supply-side bottlenecks will be only gradual, and could generate upward price surprises in the coming months.”

(Adapted from RTE.ie & ICIS.com)



Categories: Economy & Finance, Regulations & Legal, Strategy, Sustainability

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