Inflation in Eurozone Spikes to Record High, Driven by Surging Energy Costs

A man walks past the Euro sculpture in Frankfurt, Germany, on March 11, 2021. Michael Probst/AP Photo

Inflation in the eurozone notched a record high in the year through January, the European Union’s statistical agency reported, delivering an upside surprise to forecasters who predicted a significant easing of price pressures.

Prices rose by 5.1 percent in the 12 months through January in the 19 European nations that share the euro currency, according to Eurostat (pdf). That’s the highest reading in the history of the data series and a far higher number than the 4.4 percent predicted by economists.

“With shrinking base effects from the oil price and the German value-added tax (VAT)-hike from last January dropping out of the numbers, most were expecting a larger decline in headline inflation,” analysts at ING said in a note.

But these inflation-reducing impacts were more than offset by surging energy costs, which rose by an annual 28.6 percent and were by far the biggest contributor to the headline inflation number.

Alcohol, food, and tobacco prices rose 3.6 percent in January compared to 3.2 percent in December, service price inflation remained at 2.4 percent, and non-energy industrial goods edged down to 2.3 percent in January from 2.9 percent the prior month.

So-called core inflation, which strips out the volatile categories of food and energy and is viewed by economists as a better barometer of underlying inflationary pressures, fell to 2.3 percent in January from 2.6 percent in December. The drop in core inflation, while the headline number rose sharply, makes an assessment of the future inflationary path in the euro area less clear.

“This results in an inflation rate that provides both the hawks and doves plenty of ammunition for tomorrow’s European Central Bank (ECB) meeting. It far from settles the debate between how structural or temporary this current inflation rate is,” ING analysts wrote.

While there are expectations that energy prices will decline steadily and pull down the headline inflation number going forward, analysts predict that higher producer prices will get passed on to consumers and push up the goods inflation measure.

ING analysts expect eurozone inflation to ease to around the ECB’s target of 2 percent by the end of the year.

The inflation numbers come ahead of a meeting of the ECB’s Governing Council, with an announcement on interest rates expected on Thursday. The ECB has for months shrugged off data showing prices climbing, arguing that temporary factors are behind the rise and inflation will ease soon on its own.

Unlike the Fed, which has signaled it will raise interest rates in March, the ECB has insisted that any rate hikes are “very unlikely” by the end of the year.

Inflation has surged in countries across the world, with economists blaming a range of factors, including pandemic-related supply chain and labor force dislocations. Historically unprecedented levels of fiscal and monetary stimulus, along with savings accumulated during the pandemic, have also bolstered demand in the face of constrained supply, pushing up prices.