Inflation in the eurozone reached a 13-year high in September and experts and economists expect it to rise further, casting doubt on the European Central Bank’s optimistic assessment of the largest price rise since before the global financial crisis.
The growth in consumer price inflation was at 3.4 per cent year on year in the eurozone’s 19 countries in September. In comparison, it was at 3 per cent the previous month. This marked the highest rate of inflation in the region since September 2008 and was higher than the 3.3 per cent expected by analysts, according to data from Eurostat, the EU’s statistics agency.
Rise in energy costs, a reversal of the oil price fall that occurred during the Covid-19 epidemic, was mostly responsible for the inflation rise. However, durable goods prices were up 2.3 per cent from August which clearly reflected the impact of manufacturing and shipping delays.
According to estimates, inflation might reach 4 per cent by the end of the year – which would be double of the target set for inflation by the ECB, with soaring costs of natural gas and bottlenecks impacting everything from auto production to computer manufacture. The ECB has forecast a reasonably fast drop in inflation in early 2022.
However, supply-chain problems appear to be worsening, increasing the likelihood that the continued inflation rise penetrates into underlying pricing and results in more permanent damage even as companies adapt their pricing and wage policies.
For the time being, the ECB is adhering to its message that this episode of inflation will pass swiftly and that price increase will thereafter remain below its target for years to come, necessitating low borrowing costs.
However, ECB President Christine Lagarde sounded a more cautious tone this week, pointing to increasing inflation concerns while urging patience and cautioning against overreaction.
Meanwhile, market economists are changing their minds, suggesting that central banks may be underestimating the risks of inflation .
“We think there are high chances that this inflation is less transitory than all central banks, including the ECB, are suggesting,” BNP Paribas economist Luigi Speranza said.
“Consumers may start demanding higher wages and corporations may accommodate them, on the basis they could pass on higher cost via higher final prices.”
In the Eurozone in September, there was also an increase in underling prices, which are frequently monitored by policymakers as a filter for estimating the volatile food and energy costs.
The core inflation rate, which does not include food and energy prices, increased to 1.9 per cent in September from 1.6 per cent a month earlier, as did a narrower measure that also does not include alcohol and cigarettes prices.
Despite growing concerns about inflation, ECB officials are expected to err on the side of caution after the bank has consistently undershot its objective for over a decade.
In order to make sure that inflation returns to its goal, it is willing to temporarily overshoot, the ECB has said previously. This is because combating sluggish price rise has necessitated extraordinary efforts, including profoundly negative interest rates and trillions of euros in asset purchases.
Nonetheless, with the ECB’s 1.85 trillion euro pandemic emergency stimulus plan set to end in March, a small tightening of policy is inevitable in the following months.
(Adapted form LiveMint.com)