Euro zone inflation surges to 10-year-high of 3%

Euro zone inflation surged to a 10-year-high in August with further rises likely, challenging the European Central Bank’s benign view on price growth and its commitment to look past what it deems a temporary increase.

Consumer inflation in the 19 countries sharing the single currency accelerated to 3 per cent this month from 2.2 per cent in July, far above expectations for 2.7 per cent and moving well clear of the ECB's 2 per cent target. The increase was fuelled by energy costs, but food prices also surged, while there were unusually large increases in the prices of industrial goods too, according to Eurostat, the EU's statistics agency.

Markets mostly shrugged off the data, with stocks rising and yields increasing just a basis point or two, suggesting the narrative of temporary inflation and ultra-easy central bank policy for years to come remains the central one. Still, the numbers are likely to make for uncomfortable reading at the ECB.

The central bank has repeatedly raised its inflation projection this year only for the actual numbers to beat its forecasts, and price growth now seems likely to peak only in November. With inflation in Germany, the euro zone's largest economy and the ECB's biggest critic, expected to approach 5 per cent in coming months, the bank is likely to come under increasing public pressure to address price developments that are reviving long-dormant memories of runaway prices. The ECB argues that a slew of one-off factors including production bottlenecks related to the economy's reopening after the Covid-19 pandemic account for the bulk of the inflation surge, and that price growth will quickly moderate early next year. "The effects of re-opening and supply problems could intensify in the next few months. But we suspect that they will begin to fade next year as global consumption and trade patterns return to something like their pre-pandemic norms," Capital Economics said in a note. "We think the headline rate will drop to about 2 per cent in January and trend down throughout 2022 to end next year at around 1 per cent," it added. - Reuters