Countries in the 19 nation Eurozone are facing skyrocketing inflation as the Russian invasion of Ukraine threatens to raise energy prices throughout Europe, according to numbers released on March 2.
Consumer prices in the EU jumped 5.8 percent from a year ago in February, up from 5.1 percent the previous month, the fourth straight month inflation hit an all-time peak and is now at its highest level since the euro was first issued in 1997.
A core measure that excludes volatile components also accelerated, reaching 2.7 percent.
The Eurozone continues to struggle with supply shortages, lingering lockdowns, and a pre-war energy crisis.
Energy remains the main driver of inflation, according to analysis from Deutsche Bank, warning that rising oil and natural gas prices are pushing the euro lower and causing “a vicious inflationary spiral” as crude oil prices in euros hit an all-time high on March 1.
The latest numbers add additional public pressure on the European Central Bank (ECB) as it decides on when to raise interest rates in order to combat the high prices that are causing pain for Europe’s consumers.
Bundesbank warned just before the latest figures that German inflation may average 5 percent this year and that there are no signs that longer-term expectations are becoming de-anchored.
The rate on 10-year German inflation-protected debt has fallen as much as nine basis points to -2.51 percent, setting for a record low on a closing basis.
Russia, the biggest supplier of oil and gas to the EU, has been hit with sanctions and export restrictions by the Euro bloc and its allies, causing worries that supplies could be cut off and pushing global crude prices above $110 a barrel this week.
Energy prices were already rising across the continent before the Ukrainian conflict, as fuel supplies fell due to increased demand from economies recovering from the CCP (Chinese Communist Party) virus pandemic.
Energy costs rose faster last month, up by 31.7 percent compared with 28.8 percent in January, said Eurostat.Other categories saw smaller but still notable gains.
The president of the European Central Bank, Christine Lagarde, had said before the conflict that record inflation could linger for “longer than expected,” which opened the door for a slight chance for an interest rate hike this year.
The conflict in Ukraine altered the situation, combined with the recently released inflation figures, one week before European Central Bank officials are set to meet on monetary policy.The main risk now facing central bank policymakers is whether quicker tightening of interest rates will hurt an economy already under pressure.
Many analysts are awaiting a new report due next week that will offer some insight into where growth and inflation are headed.
Inflation is expected to reduce output by between 0.3 to 0.4 percentage points this year, according to ECB Chief Economist Philip Lane in a presentation last week.
ECB Executive Board member Isabel Schnabel said inflation may accelerate further in the near term and will not slow “nearly as fast as we previously anticipated.”
Suggested price growth will likely not slow below the ECB’s 2 percent goal in the medium term, said Schnabel, which is one of the conditions needed for central bank policymakers to consider raising interest rates.
European policymakers maintain that scaling back asset purchases to assist economic recovery is still their primary goal as the pandemic fades.
However, the ECB is signaling that a decision to reduce bond buying will probably be postponed, as it focuses on containing the spread of the economic consequences of the fighting in Ukraine.
The situation will depend on the direction of the conflict and its effects on the European economy.
Unless Ukraine and Russia sign a peace deal in the coming days, some European economists do not expect a hike this year.
