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Inflation in the eurozone reached its highest level on record this month, owing to rising energy prices. Eurostat statistics revealed on Tuesday that inflation is likely to peak before a sluggish drop that will keep it uncomfortably high for the rest of the year.
Energy prices were up 27% year on year due to rising oil costs, while inflation in services and non-energy industrial products, which have been a brake on price increases in recent years, was also above 2%, indicating a strong rise in underlying pricing pressures.
In November, the consumer price rise in the eurozone’s 19 member countries surged to 4.9 percent. It is by far the greatest level in the 25 years since the number has been produced, up from 4.1 percent a month before and well ahead of the 4.5 percent expected.
Despite the fact that inflation is now more than double the European Central Bank’s objective of 2%. It is unlikely to prompt policy action, even though the data is unsettling, and might put political pressure on the ECB to slow price increases.
Inflation excluding food and fuel costs, as well as a broader measure that also excludes alcohol and tobacco goods, both jumped to 2.6 percent, much above the 2.3 percent expected.
The ECB has always maintained that the inflationary increase is just transitory. This is produced by a variety of one-time reasons and will fade over time.
As a result, policy action now would be counterproductive since it would stifle economic development at a time when inflation is naturally easing.
While some policymakers have warned that high inflation, even if temporary, could trigger a surge in wages. At the same time ECB President Christine Lagarde and chief economist Philip Lane have dismissed this argument. He says that wage growth remains anemic and there is no sign that firms are permanently altering their remuneration behavior.
Indeed, the ECB has promised continued stimulus with bond buys and record low rates throughout 2022. Even a long list of central banks around the world is already tightening policy.
The potential headache is that inflation will now take months to drop and could stay above the ECB’s target until the second half of 2022.
A communication challenge for a bank that has struggled with low inflation for a decade and has little experience with price growth above its target.
The ECB will next meet on Dec. 16, when it is almost certain to end a 1.85 trillion euro emergency bond purchase scheme but will likely ramp up other measures to make up for the lost stimulus.