A stunning new increase in consumer prices in Europe indicates that inflation has penetrated the continent more tenaciously despite sluggish growth, undermining the efforts of policymakers to shepherd countries through a harsh winter and probable recession.
The European Commission stated on Monday that consumer prices in the 19 nations that use the euro as their currency grew at a record annual pace of 10.7 percent in October. In September, the unemployment rate was 9.9%. Prior to a year ago, it was 4.1%.
Europe’s elected leaders and central bankers face difficult decisions as a result of the persistent uptrend. The European Central Bank stated last week that it will raise interest rates by three-quarters of a percentage point for the second time in a row in an effort to curb inflation. Prior to September, the bank had not implemented a rate hike of this magnitude since 1999, during the first days of the eurozone.
But there are growing fears that measures to rein in inflation by raising the cost of borrowing and mortgages may hasten nations’ descent into recession, stifling investment and boosting unemployment.
According to a recent warning from the International Monetary Fund, “European policymakers confront significant trade-offs and difficult policy options as they manage a toxic combination of poor growth and high inflation that might deteriorate.”
Although the commission announced a higher-than-anticipated production growth of 0.2% for the quarter spanning July, August, and September, many analysts concur that a recession in Europe is almost likely. Monday, a number of analysts predicted that growth in the last three months of the year will decline.
For the European Central Bank, the dilemma of getting inflation under control without sending the economy into a downward cycle is especially acute.
When the bank’s head, Christine Lagarde, announced last week’s hike in interest rates, she hinted that the bank’s strong attitude would soften. However, the current inflation levels are expected to elicit a greater response from council members who continue to be inflation hawks.
This recent report from Eurostat, the commission’s statistics office, is expected to deepen the divisions among the governing council of the European Central Bank, according to Lucrezia Reichlin, an economics professor at London Business School.
She said that the combination of higher-than-anticipated inflation and production implies that supply limitations are not the only issue; increased consumer demand also contributes to rising prices.
Excruciatingly high energy and food costs have continued to drive inflation to all-time highs. In the last year, energy costs jumped by 41.9%, while food prices increased by 13.1%. Russia’s pullout from an agreement that permitted grain shipments from Ukraine is expected to cause grain prices to rise much more.
Concerningly, there are indications that inflation is spreading to additional industries.
Germany (11.6 percent), the Netherlands (16.8 percent), Italy (12.8 percent), and Slovakia were among the eurozone nations with double-digit inflation rates in the twelve months leading up to October (14.5 percent). In the Baltic states, the unemployment rate surpassed 21 percent. France has the lowest unemployment rate at 7.1%.
Germany’s economy, the biggest in Europe, grew by 0.3% annually in the third quarter, due in part to consumer spending. Italy’s GDP expanded by 0.5%, while Sweden’s expanded by 0.7%. The overall rate of growth in production fell from the 0.8% achieved in the previous three-month period. Elsewhere, growth slowed in the third quarter: output in France and Spain climbed by just 0.2%, while Austria and Belgium’s economies contracted by 0.1%.
In the bigger group of 27 nations that comprise the European Union, third-quarter growth was the same as in the eurozone, at 0.2 percent.
The International Monetary Fund has advised central bankers to maintain the status quo into next year, if possible. It was highlighted that “almost half of the recent increase in European core inflation remained unexplained by its typical sources,” implying that the conflict in Ukraine and the aftermath of the coronavirus outbreak were contributing to a new inflationary dynamic.
The majority of central bankers are resolute. On Wednesday, Federal Reserve officials are anticipated to increase interest rates by three-quarters of a percentage point. This would be the sixth price hike this year. On Thursday, the Bank of England is anticipated to increase rates by the same amount.
Global areas feel the impact of the Federal Reserve’s interest rate rises intensely. Higher interest rates attract investors, which strengthens the dollar’s worth. For developing countries with high dollar-denominated debt obligations, however, their already substantial burden increases. Similarly, nations that must import American products or basics priced in dollars, such as energy and food, are seeing a significant price increase. They fall into poverty.
While the majority of economists advocate for a tough stance on inflation, a growing number of voices wonder if central bankers are going too far, too quickly. Higher interest rates will not provide an immediate boost in the supply of oil, wheat, or microchips, and may potentially worsen shortages by discouraging investment.
The output for July, August, and September decreased by 0.6% compared to the output for the preceding three months, which increased by 0.8%.
Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, wrote on Monday that “the slowdown may have been even more severe than the headline suggests” and that growth was expected to decline in the final quarter due to “higher interest rates discouraging investment and still-high inflation causing consumers to tighten their belts over the winter.”