Eurozone Inflation Hits a Record, Further Pressuring ECB

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Rise in food prices adds to challenges facing the European Central Bank as it says rate hikes will not be needed to contain inflation

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Economists surveyed by the Wall Street Journal had expected the inflation rate to be as low as 4.7%. But while energy prices rose at a slower pace in the 12 months through December, food-price inflation rose to 4.6% from 1.9% in November.

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The jump in inflation in 2021 came as a surprise to many economists, who had expected a peak in November. As in the US, eurozone consumer prices have risen sharply in recent months as expected by policymakers, raising questions for investors, businesses and households about the credibility of the ECB’s claim that high inflation is likely to be temporary. Is.

The Federal Reserve has responded to the pickup in inflation by indicating that it may raise its key interest rate three times this year, but the ECB reiterated its view in December that raising borrowing costs will not be necessary during 2022. While a marginal increase in the rate of inflation during December is unlikely to change its stance, a longer period of high inflation is more likely to increase rates next year.

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“We expect the bank to begin laying the ground for tighter monetary policy in 2023 later this year,” said Jack Allen-Reynolds, an economist at Capital Economics.

The core inflation rate, which excludes highly volatile commodities such as energy and food, was unchanged at 2.6%. But when a fresh surge in Covid-19 infections led to slackening consumer demand, services inflation slowed, manufactured goods prices rose sharply, a sign that the logjam that clogged global supply chains was due. There is some high cost. delivered to homes.

In December the ECB said inflation was likely to remain above its 2% target for a longer period of time, raising its forecast for average price growth this year to 3.2 percent, up from 1.7% projected in September.

But ECB President Christine Lagarde said inflation is likely to moderate over the course of the year, and central bank economists predict it will average 1.8% in 2023.

“It is highly unlikely that we will raise interest rates in the year 2022,” she told reporters, adding that the bond-buying program launched to counter the economic effects of the pandemic will end in March.

The major concern of the ECB is that homes and businesses will become accustomed to rising prices faster than their target rate, paving the way for a self-reinforcing series of higher wage deals and by employers to cover their increased costs. Prices will increase for

The higher the inflation rate, and the longer it remains above the target, the greater the risk of seeing a spiral in wages and prices in the eurozone. But despite another surprise in December, economists are confident that inflation will start declining in January.

One reason lies in Germany’s efforts to support its economy during the early months of the pandemic. In July 2020, the government of the largest member of the eurozone cut its value-added tax rates for six months. This means consumer prices from July 2021 were being compared to artificially low prices a year ago, exaggerating inflationary pressures. That is no longer the case, as tax rates returned to their pre-pandemic levels in early 2021.

But the aftermath is less clear, with supply-chain disruptions and uncertainties about natural gas supplies from Russia proving to last longer than economists or policymakers expected.

There are some signs that disruptions in global supply chains are beginning to ease, and prices paid by businesses for raw materials and other inputs are rising less rapidly. A survey of purchasing managers at factories around the world in December found that input prices rose at the slowest pace since March 2021.

“Globally, while price pressure is still at peak levels and delivery times are extended, things have changed in recent months,” said James Pomeroy, an economist at HSBC.

Write Paul Hannon [email protected] . Feather

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