On 7 January, Eurostat released a flash estimate of December’s inflation in the Eurozone. Inflation in the currency bloc, as measured by the Harmonised Index of Consumer Prices (HCIP), has increased to 5.0%, up a further 0.1 percentage points from the then all-time high observed in November. Following this slight increase, inflation continues to reach new heights in the Eurozone, standing more than twice as high as the European Central Bank’s (ECB) target of 2.0%.
Amongst consumption categories, the fastest increase in prices was again observed for energy, with energy prices being a staggering 26.0% above last January’s value. On a monthly basis, energy costs were up by 0.5%. Unprocessed foods recorded the second highest growth at 4.6%. Inflation was lowest for services, at 2.4% only, relatively close to the ECB’s target.
Jonas Keck, economist at the Centre for Economics and Business Research (Cebr), says of the estimate: “(It) takes the rate of price increase to yet another all-time high, as energy prices continue driving up the cost of living. Whilst heterogeneity across Eurozone member states has already been noted in recent months, the spread has become even more drastic, with two countries now recording double-digit rates of inflation. The Omicron variant may give central banks justification to delay further monetary tightening, but such policy adjustments are expected over the new year given this mounting inflationary landscape.”
One aspect that will make future monetary policy decisions difficult for the ECB is the large divergence in inflation across individual member states. The highest rate was observed for Estonia, with 12.0% annual price growth. Inflation in the country increased by 3.4 percentage points compared to last month. Estonia is one of two countries whose inflation rate is above 10.0%, with Lithuania seeing price growth of 10.7%.
At the opposite end of the range, Malta recorded the currency bloc’s lowest inflation with 2.6% in December, followed by Portugal’s 2.8%. When looking at the Eurozone’s largest economies, Germany and France, the picture remains similar. Price growth in Germany was 5.7%, whilst in France inflation only reached 3.4%. Italian inflation amounted to 4.2%, such that the three largest economies all recorded inflation in excess of 2.0%.
The uptick in inflation comes despite the ECB having taken a more aggressive stance on inflation, in line with the Bank of England (BoE) and the Federal Reserve (Fed), both of which have taken a more hawkish stance in their latest policy adjustments. Whilst the BoE increased the bank rate from 0.1% to 0.25%, the Fed has increased the speed at which it is tapering its asset purchasing. This will see the end of the Fed’s stimulus move forward from June 2022 to March 2022. Similarly, the ECB is now aiming to phase out its quantitative easing by March 2022. However, the emergence of the Omicron variant may cause policymakers to delay further tightening of monetary policy.
Keck adds: “The continuously high rates of inflation are just one factor that is likely to hamper the Eurozone’s outlook for 2022. The Omicron variant, which is already sweeping across the UK, is expected to be the dominant variant on the continent. This will bring a risk of a return of restrictions, with COVID-19 infection rates reaching new highs in France and Italy. As a result of this uncertainty, Cebr has revised its forecast to Eurozone GDP growth downwards, with GDP expected to expand by 4.1% in 2022.”
Commenting on the Eurozone CPI data, Jesús Cabra Guisasola, senior associate at Validus Risk Management, comments: “Some of the contributors for this increase can be found in the Spanish and Italian inflation figures which increased at the fastest pace in decades. Both economies reported inflation at 6.7% and 4.2% compared to a year ago, mainly driven by the surge in electricity prices which continue pushing households’ expenses up.
“In contrast, Germany and France reported a slowdown in the inflation figures, with an increase of 5.7% and 3.4% in prices compared to a year ago, and down from the previous month’s 6% and 3.5%. “During last month’s meeting, Christine Lagarde mentioned that inflation is likely to remain elevated in the near term with a slowdown during 2022. Hence, we should not expect these mixed figures to change the dovish stance from the ECB in the coming months and continue with the plan of ending the net asset purchases under the emergency program by March.
“The divergence between the ECB’s and the Fed’s policy stances could lead to the euro continuing to depreciate versus the dollar during 2022, especially if the Fed decides to deliver the three (interest rate) hikes that most market participants are currently pricing in before the end of the year.”