Inflation set a new all-time record in the Eurozone in October, when prices were on average 10.7% higher than in the same month of the previous year. The two countries with the most moderate price increases in terms of CPI were Spain at 7.3% and France at 7.1%. This is an unprecedented increase in inflation, which puts the European Central Bank (ECB) on the ropes. The institution that regulates monetary policy in the Eurozone has already raised interest rates to 2% since the summer, yet this tightening of financing conditions has so far had no effect. Economists who argue that Europe’s inflation is supply-side rather than demand-side argue that no matter how much the ECB raises rates to cool the economy — which could exacerbate the recession — it will not succeed in containing inflation.
According to some economists, much of current European inflation is mostly due to food and energy prices, which has much more to do with what happens with the Ukraine conflict than what the ECB can do. The ECB’s ability to control prices is very limited, because it can do little about the price of food and energy. On the contrary, its capacity to do damage if they raise rates excessively in the middle of a recession, which we are entering quite soon, is very broad. Nevertheless, the ECB is using all its tools to try to fulfil its mandate: price stability, which involves achieving stable inflation of around 2%, five times lower than the current rate.
Despite constant rate rises, inflation has continued to rise: it was 8.1% in May; 8.6% in June; 8.9% in July; 9.1% in August; 9.9% in September and 10.7% in October. Eurostat has explained that the main components that have pulled prices in October have been energy, which would have increased by 41.9% year-on-year in October -the highest rate recorded-; food, alcoholic beverages and tobacco (+13.1%); non-energy industrial products (+6%) and services (+4.4%). Core inflation — which excludes the price of fresh food and energy products, as they are the most volatile — stood at 6.4% year-on-year in October, four-tenths of a percentage point above September’s level. On a monthly basis, headline inflation rose by 1.5% in October compared to September, while core inflation rose by seven-tenths of a percentage point.
The countries with the highest inflation levels were Estonia (22.4%), Lithuania (22%), Latvia (21.8%), the Netherlands (16.8%), Slovakia (14.5%), Belgium (13.1%) and Italy (12.8%). In Germany, inflation stood at 11.6%, compared to 10.9% in September, while in Portugal it rose to 10.6% in October, from 9.8% in September.
Stagnated Growth
Eurostat also released a preliminary estimate of the economic growth of the Eurozone and the EU, which recorded a 0.2% increase in GDP in the third quarter. Both the growth and inflation figures will have to be confirmed in mid-November by the EU statistics agency.
This implies a stagnation of economic growth on the continent, after a Q2 in which GDP grew by 0.8% in the Eurozone and 0.7% in the EU. While the cracks in the Eurozone economy are clearly showing, the economy continued to expand in the third quarter. In Germany, it appears that this was mainly due to the late stages of the consumption rebound, while in France, consumption growth had already stalled, and investment was a positive surprise. Spain experienced a rapid slowdown in growth, but the recovery in tourism prevented the economy from going into the red in the third quarter.
Despite some positives, the overall EU outlook remains bleak because consumer confidence is near historic lows, as real wage growth is at a multi-decade low at the moment. With interest rates rising and the economic outlook uncertain, investment expectations are also weakening. Therefore, experts still expect the economy to contract in the coming quarters.