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The founder of Mobius Capital Partners says inflation will be a “real problem” as oil prices continue to rise.
FRANKFURT, Germany – The sharp rise in oil and gas prices pushed annual inflation in the 19 countries that use the euro to its highest level for more than a decade in September. Economists and central bankers say the surge in inflation is temporary, but governments are scrambling to ease the pain of higher household utility bills nonetheless.
The European Union’s statistical agency Eurostat said on Friday inflation stood at 3.4%, down from 3.0% in August and the highest since 2008.
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The overall level of inflation was boosted by a sharp 17.4% rise in energy prices. Core inflation, which excludes volatile fuels and food, was more modest at 1.9%.
Economists and the European Central Bank say the recent surge in inflation is temporary and will subside next year. That hasn’t alleviated fears of price spikes and gas shortages this winter due to an extremely tight market for natural gas.
Natural gas traded Friday at 94.46 euros ($ 109.36) per megawatt hour in Europe, nearly five times more than at the start of this year. Reasons include high demand in Asia, less supply from Russia and cold weather last winter which depleted supplies.
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Rising prices for natural gas and electricity have raised concerns among European governments, which are taking action to limit rising residential utility bills through subsidies and tax cuts. Natural gas is a key fuel to generate electricity, so higher gas prices mean more expensive electricity bills.
Higher energy bills could leave consumers with less to spend on other things and be a burden for Europe’s recovery from the pandemic in the months to come.
“It seems likely that disposable household income will be reduced, weighing on our otherwise strong short-term outlook for consumer spending,” said Ricardo Amaro, senior economist at Oxford Economics. “However, we do not expect the ECB to tighten monetary policy parameters to counter this rise in inflation.”
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Despite recent higher inflation figures, the European Central Bank has indicated that it has no plans to tighten monetary policy in response. The central bank sees higher inflation due to transient factors such as supply bottlenecks and statistical comparisons with extremely low energy prices a year earlier at the height of the pandemic recession.
The bank predicts that inflation will decline next year, and ECB President Christine Lagarde has said she will not overreact by reducing support for the economy in order to counter inflation that is only temporary. Central bank staff projections predict inflation of just 1.7% next year and 1.5% in 2023, below the bank’s target of 2% considered best for the economy.
The bank’s support measures include 1.85 trillion euros ($ 2.14 trillion) in bond purchases that are expected to run through at least March 2022, a move aimed at cutting costs of market borrowing for businesses.
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Although the ECB has not indicated when it will end the program, inflation which could possibly reach 4% this year in Europe makes “more likely that the ECB will significantly reduce its asset purchases in March,” wrote Jack. Allen-Reynolds, senior. Economist Europe at Capital Economics, in an emailed comment.
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