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Eurozone inflation has accelerated more than expected to reach its highest level in 13 years, adding to the debate over how long it will continue to rise after the crisis.
Consumer prices rose 3.4% in September, against estimates of 3.3%, according to figures released by Eurostat on Friday. The rate excluding volatile components like food and energy jumped to 1.9%, a level not seen since 2008.
The growth in prices is mainly due to the effects associated with the pandemic and the reopening of economies after long periods of virus-induced closures. The European Central Bank expects it to peak later this year, before a slowdown occurs in 2022.
However, supply chain bottlenecks in manufacturing are already lasting longer than initially expected, and surveys show companies are increasingly trying to pass costs on to customers to protect their profit margins.
On the other hand, the deep energy crisis is adding to the pressure. Energy prices rose 1.3% in September and are up more than 17% from the previous year. Prices for industrial non-energy goods rose 2.3% from August.
European Central Bank President Christine Lagarde reiterated this week that she considers the current rally “largely temporary”, warning of overreaction and premature tightening of monetary policy. Some of his colleagues have expressed concern that the official forecast will turn out to be too low, although most still expect price growth to slow down eventually.
German figures on Thursday showed the inflation rate to hit 4.1%, the highest in nearly three decades. Although this is mainly due to statistical effects, the Bundesbank predicts that the rate will remain above the ECB’s 2% target until the middle of next year.
The main factor that could keep rates so high for a longer period is wage increases which, in turn, risk inducing further price increases. This is something the ECB needs to be aware of and ready to respond to if it happens, Central Bank of Ireland Governor Gabriel Makhlouf said on Bloomberg TV this week.
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