Euro-area inflation hits record as war threatens more price pain

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Euro-zone inflation quickened to an all-time high, outstripping expectations as Russia’s invasion of Ukraine threatens to send energy costs soaring at an even faster pace.

Consumer prices jumped 5.8% from a year ago in February, up from 5.1% the previous month and more than the 5.6% median economist estimate in a Bloomberg survey. A core measure that excludes volatile components also accelerated, reaching 2.7%.

Energy remained the main driver, with an analysis from Deutsche Bank warning that rising oil and natural gas prices are pushing the euro lower and causing “a vicious inflationary spiral.” Crude priced in the common currency hit an all-time high on Tuesday.

The data come a week before European Central Bank officials meet to set monetary policy — a task that’s being complicated by the outbreak of the war just across the euro region’s border.

With Europe in recovery mode as the pandemic fades, policy makers maintain that scaling back asset purchases is still their goal. But they’re signaling that a decision to wind down bond-buying will probably be postponed as the focus shifts to containing the knock-on effects from the fighting.

Much will depend on how Russia’s assault affects the euro-area economy, which remains blighted by supply shortages, lingering virus curbs and the energy spike.

New projections due next week will offer some insight into where growth and inflation are headed. The crisis will reduce output by between 0.3 to 0.4 percentage point this year, according to projections presented by ECB Chief Economist Philip Lane last week.  

Lane’s Executive Board colleague Isabel Schnabel has said inflation may accelerate further in the near term and won’t slow “nearly as fast as we previously anticipated.” She also suggested price growth won’t slow below the ECB’s 2% goal in the medium term — one of the conditions needed for policy makers to consider raising interest rates.

Unless Ukraine and Russia strike a peace deal in the coming days, economists at Nordea don’t expect a hike this year. Money markets this week pushed wagers on the ECB raising borrowing costs back into 2023.

Officials should take time to thoroughly assess the implications of the war before continuing with their stimulus exit, according to Governing Council member Olli Rehn, who told Bloomberg on Tuesday that “the direction of normalization is still, in my view, appropriate.”


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