Euro zone inflation soars to highest rate on record

Euro zone inflation soared to its highest rate on record this month on surging energy costs, likely peaking before a slow decline that will keep it uncomfortably high for much of the next year, data from Eurostat showed on Tuesday.

Consumer price growth in the 19 countries sharing the euro accelerated to 4.9 per cent in November, by far the highest level in the 25 years since the figure has been compiled, and up from 4.1 per cent a month earlier. It is well ahead of expectations for 4.5 per cent.

Ireland’s inflation rose to 5.4 per cent, up from 5.1 per cent in October. Lithuania has the highest inflation in the euro zone at 9.3 per cent, compared with 8.2 per cent last month.

Energy prices were up 27 per cent compared with a year earlier as oil prices soared but inflation in services and non-energy industrial goods, a drag on price growth in past years, were also both above 2 per cent, suggesting a rapid rise in underlying price pressures.

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Although inflation is now more than twice the European Central Bank’s 2 per cent target, it is unlikely to trigger any policy action, even if the data make for uncomfortable reading and could trigger political pressure on the ECB to rein in price growth.

The ECB has long argued that the inflation surge is temporary, caused by a range of one-off factors, and will subside over time so policy action now would be counterproductive as it would thwart economic growth just when inflation eases on its own.

Wage surge

While some policymakers have warned that high inflation, even if temporary, could trigger a surge in wages, ECB president Christine Lagarde and chief economist Philip Lane have dismissed this argument, saying that wage growth remains anaemic and there is no sign that firms are permanently altering their remuneration behaviour.

Indeed, the ECB has promised continued stimulus with bond buying and record low rates throughout 2022, even as a long list of central banks around the world are already tightening policy.

The potential headache is that inflation will now take months to drop and could stay above the ECB’s target until the second half of 2022, a communication challenge for a bank that has struggled with low inflation for a decade and has little experience with price growth above its target.

Underlying prices, a key focus for policymakers as they exclude volatile food and energy prices, also surged.

Inflation excluding food and fuel prices and a narrower measure that also excludes alcohol and tobacco products, both rose to 2.6 per cent, well ahead of expectations for 2.3 per cent.

Although both of those figures were high, Mr Lane has dismissed these readings in recent weeks, arguing that they are skewed by post-pandemic factors and so are not accurate gauges of actual underlying price growth.

The ECB will next meet on December 16th, when it is almost certain to end a €1.85 trillion emergency bond purchase scheme but will likely ramp up other measures to make up for the lost stimulus. – Reuters