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Eurozone inflation soars to new record over Ukraine war

BRUSSELS (AFP) – Eurozone inflation accelerated to another record high in May, data showed yesterday, as the war in Ukraine stoked energy and food prices and threatened to flatline the economy.

The European Union’s (EU) Eurostat data agency said that the increase in consumer prices in the 19 countries that use the euro reached 8.1 per cent compared to the year before, up from 7.4 per cent in April.

The uninterrupted rise in prices heaped pressure on the European Central Bank (ECB) to speed up interest rate rises for the first time in over a decade. The ECB has said it plans to hike interest rates in July in order to cool the pressure on prices and is expected to officially end its bond-buying stimulus policies as early as next week.

By raising rates, the ECB would be playing catch-up with other major central banks that have already made moves to tame inflation that has spread globally. The United States (US) Federal Reserve raised rates by an unusually large 50 basis points at the beginning of May, while the Bank of England sealed its fourth consecutive hike.

The Chief Economist of the European Central Bank Philip Lane, indicated on Monday that interest rates in the eurozone will rise more cautiously, going up by 0.25 per cent in July and again in September.

A customer pays for vegetables at the Maravillas market in Madrid. PHOTO: AP

This would lift the ECB’s bank deposit rate out of negative territory, meaning lenders would no longer pay to park their excess cash at the central bank. The ECB had previously argued that sharp leaps in consumer prices, driven also by the waning effect of COVID-19 pandemic, were likely to let up, downplaying the inflationary threat. Russia’s war in Ukraine disrupted that view, worsening already disrupted supply chains and throwing up new shortages in essential material from wheat to metals.

This remained that case in May with energy prices spiking by a hair-raising 39.2 per cent from a year earlier. Food prices went up by 7.5 per cent. Western economies including Germany – the eurozone’s biggest – are scrambling to wean themselves off Russian energy, which will also have its effects on inflation.

The EU on Monday agreed to ban two-thirds of its oil dependency by the end of the year – and German and Polish pledges to voluntarily forgo pipeline deliveries could push the cut to 90 per cent – which could put still more upward pressure on prices.

The ban on Russian oil swiftly hit the market price for oil which means “that risks (to inflation) are skewed once again to the upside”, said Oxford Economics in a note.

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