The European Commission warned on Thursday that inflation in euro-area countries, which has rocketed to new highs in recent months, is projected to peak in the first quarter of this year, as consumers feel the pinch of increased energy prices and growing costs of essential commodities.
According to the European Commission’s quarterly economic projection, inflation in the euro area will reach 4.8 percent in January-March, up from 4.6 percent in the fourth quarter of last year, which was a record since the union began measuring inflation collectively in 1997. Inflation is predicted to fall this year, but it won’t reach the European Central Bank’s objective of 2% until 2023, according to the prediction.
As the effects of the epidemic fade, economies will continue to thrive, with the euro area set to increase by 4% this year, according to projections, and will have recovered all of their pandemic-era economic losses by the end of the year.
Inflation, on the other hand, will surpass the average rate of economic progress, diminishing gains and advantages that such growth would otherwise provide to Europeans.
Is there inflation in Europe?
- In the last few days, Bundesbank Governor Joachim Nagel has become the second central banker to suggest that the ECB may raise rates later this year.
- Annual inflation in the euro area is expected to grow from 2.6 percent in 2021 to 3.5 percent in 2022, before falling to 1.7 percent in 2023, according to the commission.
- Inflationary expectations, as well as the European economy as a whole, are influenced by tensions between Ukraine and Russia.
Why is Europe’s inflation so high?
Inflation in Europe, fueled by high oil and gas costs, reached new highs for the third month in a row, exacerbating consumer hardship and raising worries about the European Central Bank’s future actions.
Consumer prices in the 19 euro-area nations rose by 5.1 percent on an annual basis in January, according to Eurostat, the European Union statistics agency. The rate shattered previous highs of 5% in December and 4.9 percent in November, and was the highest since records began in 1997.
Energy prices, which rose by a whopping 28.6%, played a key influence once again. Oil prices have risen as the world economy recovers from the worst effects of COVID-19 limitations, while natural gas prices have risen in Europe as a result of depleted winter stocks, reduced Russian supply, and worries of a fresh military offensive by Moscow against Ukraine.
Higher energy bills for consumers have swiftly become a political issue in Europe, as governments offer subsidies and tax incentives to help households weather the storm. Higher inflation makes everything more expensive for individuals, from food to fuel, and has been a stumbling block to Europe’s recovery.
According to the General German Automobile Club (ADAC), gasoline prices in Germany have reached a new high of 1.712 euros per litre. That works out to be $7.31 per gallon.
In the latter three months of 2021, the eurozone’s economic growth slowed to 0.3 percent, as coronavirus infections caused by the Omicron strain resulted in new regulations and discouraged customers from engaging in in-person activities such as eating out.
Inflationary pressures have heightened interest in the European Central Bank’s policy meeting on Thursday. Much of the inflation, according to Bank President Christine Lagarde, is due to transient reasons that will decrease over time.
As a result, she’s stated that it’s “The bank’s decision to raise interest rates this year, the traditional antidote to excessive inflation, is “very improbable.”
According to Andrew Kenningham, chief Europe economist at Capital Economics, the bank might eliminate the “very” before “unlikely” on Thursday, but would otherwise continue to its road map predicated on intentions to take out the rest of the economic stimulus by the end of 2022.
“That would pave the way for the bank to raise rates, with the first boost coming in early 2023, though a hike at the end of this year is also plausible, according to Kenningham.
The European Central Bank’s approach contrasts markedly with that of the Federal Reserve of the United States, which has indicated that rate hikes could begin as early as March. In December, annual consumer inflation in the United States reached a 40-year high of 7%.
Markets will be looking to see if the European Central Bank’s stance changes, according to analysts. Inflation is expected to fall dramatically this year, to 1.8 percent in 2023 and 2024, according to the bank.
It cites temporary inflationary reasons like as bottlenecks in parts and raw material deliveries, which limit supply and raise prices, as well as parallels to extraordinarily low energy prices during the worst of the epidemic slowdowns. Inflation statistics will eventually remove those comparisons.
What is the current rate of inflation in Europe?
Highlights. In February 2022, annual inflation in the Eurozone was 5.9%, up from 5.1 percent in January 2022. The data in this article are based on the current Harmonised Index of Consumer Prices (HICP).
Why is inflation in 2022 so high?
As the debate over inflation continues, it’s worth emphasizing a few key factors that policymakers should keep in mind as they consider what to do about the problem that arose last year.
- Even after accounting for fast growth in the last quarter of 2021, the claim that too-generous fiscal relief and recovery efforts played a big role in the 2021 acceleration of inflation by overheating the economy is unconvincing.
- Excessive inflation is being driven by the COVID-19 epidemic, which is causing demand and supply-side imbalances. COVID-19’s economic distortions are expected to become less harsh in 2022, easing inflation pressures.
- Concerns about inflation “It is misguided to believe that “expectations” among employees, households, and businesses will become ingrained and keep inflation high. What is more important than “The leverage that people and businesses have to safeguard their salaries from inflation is “expectations” of greater inflation. This leverage has been entirely one-sided for decades, with employees having no capacity to protect their salaries against pricing pressures. This one-sided leverage will reduce wage pressure in the coming months, lowering inflation.
- Inflation will not be slowed by moderate interest rate increases alone. The benefits of these hikes in persuading people and companies that policymakers are concerned about inflation must be balanced against the risks of reducing GDP.
Dean Baker recently published an excellent article summarizing the data on inflation and macroeconomic overheating. I’ll just add a few more points to his case. Rapid increase in gross domestic product (GDP) brought it 3.1 percent higher in the fourth quarter of 2021 than it had been in the fourth quarter of 2019. (the last quarter unaffected by COVID-19).
Shouldn’t this amount of GDP have put the economy’s ability to produce it without inflation under serious strain? Inflation was low (and continuing to reduce) in 2019. The supply side of the economy has been harmed since 2019, although it’s easy to exaggerate. While employment fell by 1.8 percent in the fourth quarter of 2021 compared to the same quarter in 2019, total hours worked in the economy fell by only 0.7 percent (and Baker notes in his post that including growth in self-employed hours would reduce this to 0.4 percent ). While some of this is due to people working longer hours than they did prior to the pandemic, the majority of it is due to the fact that the jobs that have yet to return following the COVID-19 shock are low-hour jobs. Given that labor accounts for only roughly 60% of total inputs, a 0.4 percent drop in economy-side hours would only result in a 0.2 percent drop in output, all else being equal.
Why is inflation in the United Kingdom so high?
According to the ONS, the cost of clothing and footwear drove up inflation last month, with retailers offering the smallest January discounts since 1990.
However, inflation is skyrocketing across the economy, with the Consumer Price Index (CPI) already more than double the Bank of England’s 2% objective and on track to hit 7.25 percent in April, the highest level since August 1991.
Rising energy and gasoline costs have been the primary drivers of inflation, which has reached near 30-year highs, though the cost of food, drink, and many other necessities has also risen.
“Clothing and footwear pushed inflation up this month, and while there were still regular price declines, it was the smallest January fall since 1990, with fewer sales than last year,” said Grant Fitzner, chief economist at the ONS.
Who is the most affected by inflation?
According to a new research released Monday by the Joint Economic Committee Republicans, American consumers are dealing with the highest inflation rate in more than three decades, and the rise in the price of basic products is disproportionately harming low-income people.
Higher inflation, which erodes individual purchasing power, is especially devastating to low- and middle-income Americans, according to the study. According to studies from the Federal Reserve Banks of Cleveland and New York, inflation affects impoverished people’s lifetime spending opportunities more than their wealthier counterparts, owing to rising gasoline prices.
“Inflation affects the quality of life for poor Americans, and rising gas prices raise the cost of living for poor Americans living in rural regions far more than for affluent Americans,” according to the JEC report.
What is the rate of inflation in Europe in 2022?
According to a flash estimate from Eurostat, the European Union’s statistical office, annual inflation in the euro area will be 5.8% in February 2022, up from 5.1 percent in January.
Is inflation in the United Kingdom increasing?
In recent months, prices in the United Kingdom have grown dramatically, and are now significantly more than they were a year ago. The rate of inflation is the rate at which that increase occurs.
Inflation accelerated in 2021, and it has continued to accelerate this year. This spring, we anticipate it to be around 8%. We believe it will rise even further later this year.
However, we anticipate a significant decrease in inflation over the next few years.
This is because we do not expect the current high pace of inflation to be sustained by these factors. It’s improbable that energy and imported goods prices would continue to climb at the same rate as they have recently. Inflation will be lower as a result of this.
However, even if the pace of inflation slows, some items’ prices may remain high in comparison to previous years.
Inflation in the United Kingdom vs. Europe
Rate of the Consumer Price Index (CPI) in January 2022 When you compare the present rate to that of our closest neighbors, the UK’s CPI is at the top of the list. However, it is not as high as Spain (6.1%), the Netherlands (6.4%), or Belgium (7.59%), and it is only 0.2 percent higher than the EU average.
Is inflation bad for business?
Inflation isn’t always a negative thing. A small amount is actually beneficial to the economy.
Companies may be unwilling to invest in new plants and equipment if prices are falling, which is known as deflation, and unemployment may rise. Inflation can also make debt repayment easier for some people with increasing wages.
Inflation of 5% or more, on the other hand, hasn’t been observed in the United States since the early 1980s. Higher-than-normal inflation, according to economists like myself, is bad for the economy for a variety of reasons.
Higher prices on vital products such as food and gasoline may become expensive for individuals whose wages aren’t rising as quickly. Even if their salaries are rising, increased inflation makes it more difficult for customers to determine whether a given commodity is becoming more expensive relative to other goods or simply increasing in accordance with the overall price increase. This can make it more difficult for people to budget properly.
What applies to homes also applies to businesses. The cost of critical inputs, such as oil or microchips, is increasing for businesses. They may want to pass these expenses on to consumers, but their ability to do so may be constrained. As a result, they may have to reduce production, which will exacerbate supply chain issues.