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Eurozone inflation rises to new record high

BRUSSELS (AFP) – Inflation in the eurozone soared to a new record high in January, official data showed yesterday, adding pressure on the European Central Bank (ECB) ahead of a monetary policy meeting this week.

The figure hit 5.1 per cent last month, a first since the official Eurostat agency started to compile the data in 1997.

The ECB, in charge of eurozone monetary policy, has a medium-term inflation target of two per cent.

Its board meets today and observers expect the ECB to stick to its current rates, which are historically low in the wake of the coronavirus pandemic, despite the inflationary pressure.

Any tightening could threaten economic recovery, and weigh down indebted companies
and governments.

“January’s inflation data support our view that the ECB will soon forecast inflation to be at its target over the medium term,” the firm Capital Economics said in response to the latest data.

“Accordingly, we think that policymakers will end net asset purchases completely this year and prepare to start raising interest rates in early 2023, if not sooner,” it said.

A light installation is projected onto the building of the European Central Bank in Frankfurt, Germany. PHOTO: AP

ECB Chief Christine Lagarde insisted inflationary pressure is “transitory” and should ease over the course of the year. She said the sudden bounceback of economies from Covid restrictions has caused the steep energy price rises.

Inflation had already hit a record five per cent in December.

ING analyst Charlotte de Montpellier told AFP the inflation increase was surprising and added ammunition to the argument for an ECB rate hike.

“We expected a little drop” in January’s inflation, with consensus around 4.4 per cent, she said.

“This shows that inflationary pressures in the eurozone are very big, and certainly bigger than what the ECB had in its last forecasts.”

Energy accounted for 28.6 per cent of the inflation surge seen in the eurozone in January, Eurostat said. That weight has grown since December, when it represented 25.9 per cent of the overall price jump.

Food and other consumables accounted for 3.6 per cent, also an increase over the previous month, while services jumped 2.4 per cent.

Inflation for non-energy industrial goods rose 2.3 per cent in January, lower than the 2.9 per cent seen in December.

Inflation is becoming a point of increasing anxiety in the eurozone, as in other economies around the world facing supply constraints and sudden demand for energy as businesses try to jump back into pre-pandemic mode.

The European Union (EU) is also confronted with other variables weighing on its energy market.

In the short-term, there are climbing tensions with Russia – its main natural gas supplier – over Ukraine.

Over the longer-term, there is the bloc’s transition towards a net carbon-zero future that will require shifting away from fossil fuel sources to renewable ones.

Capital Economics said its current forecast was for eurozone inflation to fall to around 2.5 per cent by the end of 2022 – “though that assumes that both oil and natural gas prices come down significantly from current levels”.

It added, “The January inflation surprise suggests that the risks to our already above-consensus forecasts are to the upside.”

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