Eurozone Inflation Hits New File, Elevating Stress on ECB

Eurozone inflation charges jumped to a different reporting level in March, as Russia’s invasion of Ukraine pushed up electricity and meal costs, putting more stress on the European central financial institution to raise its key interest rate.

Russia accounts for about 40 percent of the European Union’s imports of pure fuel, a key energy source for the bloc. It also provides 1/4 turn of the bloc’s oil imports. As oil and fuel imports continued to move from Russia to Europe, market costs rose, reflecting concerns about future availability.

The European Union statistics company said on Friday that customer costs were 7.5% higher in March than a year earlier, a rebound from the 5.9% inflation charge recorded in February.

It was the fifth month in a row that inflation charges reached a new record in a sequence of knowledge that dates back to the beginning of 1997, two years before the launch of the euro. National figures indicate that the current inflation rate could be even higher. Germany’s inflation measure for March was the best since 1981, while Spain’s was the best since May 1985.

“Inflation continues to be stronger than expected and all the opposing forecasters have anticipated it”” said Jack Allen-Reynolds, economist at Capital Economics. “So that means there will be a much bigger impact on family incomes and probably an even bigger impact on consumption.”

Much of the pick-up in inflation was driven by electricity costs, which were 44.7 percent higher than a year earlier, after being 32 percent higher in February. Meal price inflation also increased, from 4.2% in February to 5% in March. Russia and Ukraine are large exporters of wheat, and the difficulties of transporting this grain by the Black Sea and various roads, in addition to the possibility that Ukraine may not have the ability to plant for the next year’s harvest, have increased global costs.

The United States has only to publish the figures for March, but in February the annual inflation rate rose to 7.9%, its highest level since January 1982. While customer costs in the US have risen as rapidly as within the eurozone, so have wages, leaving eurozone staff to suffer a greater lack of real spending energy.

At the end of last year, the ECB’s blanket manufacturers were counting on lower electricity costs—as demand for winter heating fuels eased towards the beginning of March—to help reverse the rise in inflation and bring it back to its 2% target at the beginning of this year.

The Russian conflict in Ukraine has dashed these hopes. ECB economists now expect inflation costs to reach 5.1% this year, after raising their forecasts by all three.1% expected in December. Economists have mentioned that a 7.1% improvement is achievable if energy costs are higher than they assume.

Commodity costs are climbing. However, the costs that buyers pay on the open market for products like espresso, copper or corn may have little to do with the value that customers pay on the retailer. WSJ’s Dion Rabouin explains. Illustration: Adele Morgan

The invasion also means that financial progress must be weaker than the ECB had anticipated at the beginning of the year, largely due to excessive power and that payments will reduce the amounts that households can spend on different items and businesses.

With inflation expected to accelerate further, buyers and traders are increasingly expecting the ECB to raise its key interest rate this year. Last month, the central financial institution introduced a discount in its bond purchases that could see this system end within three months by means of September. At the moment, he mentioned that an increase in his key fees could comply “some time” after the peak of bond purchases.

The latest is related to the costs of the presidency’s bonds, and buyers are now planning two additional fee increases this year, each by 1 / 4th of an action level, adopted by up to three in 2023.

The ECB’s biggest fear is that higher electricity costs will push staff to ask for larger wage increases than they have recently obtained and that companies that are already experiencing higher electricity prices will increase their costs to protect their income, triggering an additional wave of salary calls for.

These concerns are partly fueled by a job market that was strengthening before the invasion of Russia. Figures released by Eurostat on Thursday confirmed that the eurozone’s unemployment rate had fallen to a record low of 6.8% as 181,000 employees found jobs. The decline had been significantly rapid among young people in the first 12 months, with the unemployment rate for people aged 25 or younger falling to 14% in February, from 18.6% a year earlier. This decrease was more than 3 times greater than for all residents of working age.

Regardless of the steady decline in unemployment costs over the previous year, staff who do not receive a higher salary will increase for the time being. The personal measure of salary offers negotiated by unions and related ECB teams recorded a modest improvement of 1.5% in 2021, the smallest increase since 2017.

The ECB leaders understood that they could also respond to the influence of the conflict on the financial system by offering additional stimulus measures rather than withdrawing them.

“We must also be fully prepared to appropriately revise our financial hedging parameters if the shock of the central bank and the Russian-Ukrainian conflict were to result in a sharp deterioration in the macroeconomic outlook and thus weaken the medium-term inflation outlook,” said the ECB’s chief economist

Philip Lane.

mentioned in a speech on Thursday.

Rising Costs Are All over the place

Write to Paul Hannon at [email protected]

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