A shocking new jump in consumer prices in Europe shows that inflation is still digging its way across the continent, even though growth is slowing. This makes it harder for policymakers to steer economies through a hard winter and a possible recession. In October, inflation in the Eurozone went above 10%, with a severe cost of living crisis putting additional stress on the European Central Bank.
The hike in prices
The European Commission revealed on Monday that consumer prices in the 19 Eurozone countries climbed at a historic annual rate of 10.7% in October. The rate was 9.9% in September. Just a year ago, it was at 4.1%.
Food and energy costs continue to soar to record highs, driving up inflation. Both energy and food prices have climbed significantly over the past year, at 41.9% and 13.1% respectively. Grain prices are likely to increase considerably higher because of Russia’s pullout from a deal that permitted grain exports from Ukraine. A more stringent metric of food inflation that also excludes alcohol and cigarettes saw an increase to 5% from 4.8 percent, while inflation excluding unprocessed food and energy increased to 6.4 percent from 6 percent.
Russia’s withdrawal from Black Sea grain deal triggers food price hike
Inflationary consequences of Russia withdrawing from a Black Sea grain deal mediated by the UN are also being monitored. Along with the Eurozone, other countries also face the consequences of the withdrawal. As a result of Russia’s withdrawal from the accord, fears over global supply led to a nearly 6% increase in wheat and a 2% increase in grain on Monday.
EU foreign policy chief Josep Borrell said on Twitter, “Russia’s decision to suspend participation in the Black Sea deal puts at risk the main export route of much-needed grain and fertilizers to address the global food crisis caused by its war against Ukraine.”
Lyn Graham-Taylor, senior rates strategist at Rabobank stated, “Food inflation has been a big deal and any decline in grain shipments from Ukraine is not going to help the inflation issue.” He added, “It’s another wrinkle to add to the many inflationary issues out there.”
Slower growth of Eurozone economy
GDP (gross domestic product) estimates for the third quarter of the euro area were 0.2%, according to the latest issued growth data. After experiencing 0.8% growth in the second quarter, the area experienced a decline. Only Belgium, Latvia, and Austria recorded GDP rates below zero.
Germany, the biggest economy in Europe, saw a 0.3 percent annual growth rate during the third quarter, in part due to consumer spending. Both Italy’s and Sweden’s economies expanded by 0.5 and 0.7 percent respectively. In other regions, growth slowed in the third quarter: Belgium and Austria’s economies contracted by 0.1 percent, while France and Spain’s output climbed by just 0.2 percent apiece. The 19-member EU has avoided a recession thus far, but a slowdown in the economy is evident. Numerous economists anticipate a decline in GDP for the current quarter.
Andrew Kenningham, the chief Europe economics expert at Capital Economics, said “the increase in eurozone GDP in the third quarter does not alter our view that the eurozone is on the cusp of a recession.” He further stated, “But with inflation having jumped to well over 10%, the ECB will prioritize price stability and press on with rate hikes regardless”.
Before and throughout the data releases, the euro dropped below parity against the US dollar in early European trading hours on Monday. The ECB has expressed concern over the euro’s recent decline versus the dollar because it anticipates that this will further increase inflation in the eurozone.
Italy’s inflation is above 12%, Germany’s 11.6%
The data released on Monday reflects last week’s flash estimates from various nations. The headline inflation rate in Italy, at 12.8% year over year, exceeded analysts’ forecasts. More than half of the countries in the eurozone had double-digit inflation rates in the 12 months leading up to October. Germany reported that inflation increased to 11.6%, while France reported a 7.1% increase. Other countries include the Netherlands (16.8%), Italy (12.8%), and Slovakia (10.0%).
The Baltic countries saw rates rise above 21%. But there are several countries in the Eurozone where inflation increased by more than 20%. Latvia, Lithuania, and Estonia are included in this. France had the lowest inflation rate.
Risk of a further surge in inflation
The persistent uptrend makes Europe’s elected leaders and central bankers face painful choices. The European Central Bank (ECB) opted to increase rates by 75 basis points for a second consecutive week last week, saying it had achieved “significant progress” in normalizing rates in the region but “expects to raise interest rates further, to guarantee the timely return of inflation to its 2% medium-term inflation target.” Since the very beginning of the Eurozone in 1999, the bank has not implemented such a significant hike until September.
However, there are rising worries that attempts to control inflation by raising the cost of borrowing and mortgages could hasten the recessionary process in countries, stifling investment and raising unemployment. Salomon Fiedler, an economist at Berenberg, stated, “the continuing surge in consumer prices and still-resilient domestic demand in the summer indicates a risk that the European Central Bank may hike rates by 75 basis points in December, rather than the 50 basis points we currently expect.”
The International Monetary Fund recently issued a warning “European policymakers face severe trade-offs and tough policy choices as they address a toxic mix of weak growth and high inflation that could worsen.”
The data suggests that the ECB will continue to raise rates to bring inflation back down to its target level. According to Commerzbank senior economist Christoph Weil, “The ECB’s goal of pushing the inflation rate back to just under 2 percent on a sustainable basis seems a long way off. Noting the ECB forecast inflation at 9.2 percent in the final quarter of 2022.”
The ECB Governing Council is under more pressure, as a result, to boost key rates even higher. ECB President Christine Lagarde said the possibility of a recession in the eurozone had increased during the following news conference.