Euro Zone Inflation Hits 30-Year High

Brussels’ preliminary estimate of euro zone inflation for November came in at 4.9%, representing the highest year-on-year level since 1991. The reading is up from 4.1% in October, and comes in well above the consensus expectation of 4.5%.

Rising energy costs far and away accounted for the greatest price increases, with energy costs up 27.4% compared to November of last year. Both services and food costs saw increases from the previous month, with services coming in at 2.7% (up from 2.1%) and food 2.2% (up from 1.9%).

In terms of month-on-month momentum, prices increased by 0.5% in November; prices were up across the board with the exception of services, which dipped 0.2% from October 2021 levels.

On the upper band of the inflation trend lies Lithuania (an estimated 9.8% annual inflation for November), Estonia (8.4%), Latvia (7.4%), and Belgium (7.1%). On the lower end, Italy (4%), France (3.4%), Finland (3.4%), Portugal (2.7%), and Malta (2.3%). Germany – Europe’s largest economy and ever-vigilant guardian against any and all inflationary forces – registered an estimated annual November rate of 6% (HICP), which is just shy of its all-time post-war record from 1992.

The political subtext of the November disclosure is obvious: this will increase pressure on the ECB to give some ground on its dovish policy outlook, which presently entails ongoing quantitative easing measures and a no-hike pledge through 2023. Similar forces are at work in other major central banks; for example, just today Fed head Jerome Powell admitted that “factors pushing inflation upward will linger well into next year,” representing the latest shift of an official line that had previously maintained that inflation would dissipate in early 2022.

The ECB has been more dogged in sticking to its original outlook of a waning inflation trend through 2022; however, the November numbers could well change this. A likely source of pressure will be the new government in Germany, which includes the traditionally inflation-averse FDP in charge of the finance portfolio. To this end, incoming Finance Minister Christian Lidner has been tweeting about how inflation is a legitimate concern in the wake of Germany’s near record-setting November result.

The epidemiological outlook could also muddle the inflation picture in the European context. With COVID cases surging across the continent, lockdowns and other restrictions are starting to crop up; for example, Austria, which entered a full lockdown on November 22, and Slovakia which followed suit with a two-week lockdown on November 24. Additional lockdowns now appear likely as countries such as Netherlands, Germany, Czech Republic, and Hungary are all breaking case records on a daily basis (recall that Angela Merkel’s final act was a failed attempt at a two-week lockdown).

This is the situation that is prevailing before the impacts of the new omicron variant are brought to bear. If omicron ends up being as-advertised – admittedly a big if – the result would be more lockdowns and a bolstered case for a dovish and stimulative stance at the ECB. However, the inflationary consequences of such a contingency remain to be seen because, as pointed out by the ECB itself, this is a completely unprecedented situation. Inflationary trends such as supply chain disruptions and wage inflation could hypothetically persist, albeit in a slightly muted form, through a new global wave of COVID. Even energy prices – which have proven one of the most powerful inflationary forces over the past year – could remain higher than expected due to mounting under-investment and a potentially uneven global footprint from this latest wave.

One way or another, 2022 is shaping up to be a decisive year for the ECB and central bankers around the world.

Courtesy: Geo Political Monitor