Eurozone crisis: EU single currency bloc on alert as inflation rockets to near-decade high

EU at ‘crunch point’ over future of the Eurozone says expert

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The harmonised index of consumer prices across the EU’s single currency bloc jumped to three percent in August from a year earlier. The figure was up from 2.2 percent in July and exceeded the expectations of most economists. Consumer prices have not risen as fast in the 19-country euro area since November 2011 when the European Central Bank had just raised interest rates for the region.

The increase in inflation rate is likely to pile pressure on the ECB to slow down the pace of its bond-buying scheme.

Prices in August jumped or were flat year-on-year in every Eurozone country.

The highest inflation rates of between 4.5 and five percent were in Estonia, Lithuania and Belgium.

Only four Eurozone nations now have inflation below two percent, down from 16 countries in March.

Most worryingly in Germany, the EU’s largest economy, inflation jumped to a fresh 13-year high, according to data published yesterday.

The figure rose 3.4 percent this month compared with 3.1 percent in July, figures from the Federal Statistics Office showed.

Germany’s Bid newspaper bemoaned the “new inflation shock” on its front page today.

France suffered a similar fate with its inflation accelerating rapidly to 1.9 percent in August.

This was compared to 1.2 percent in July, according to provisional estimates published by INSEE.

“This rise in inflation is believed to be the result, in particular, of the rebound in the prices of manufactured products in connection with the end of the summer sales,” said the Statistics Institute.

In the past year, energy prices rose 15.4 percent, food, alcohol and tobacco prices jumped by two percent and industrial goods faced increases of 2.7 percent.

Less volatile markets have seen their prices more than double to 1.6 percent, the highest level of Core inflation since 2012.

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Economists expect inflation to steadily fall against next year as temporary coronavirus measures, such as furlough schemes or economic boosters, are phased out.

Jack Allen-Reynolds, an economist at Capital Economics, said: “The effects of reopening the supply problems could intensify in the next few months.

“But we suspect that they will begin to fade next year as global consumption and trade patterns return to something like their pre-pandemic norms, and producers, especially of semiconductors – are able to increase their output.”

He predicted the headline rate of Eurozone inflation would drop to about two percent in January and continue falling to around one percent by the end of next year.

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The sudden increases in inflation rates are likely to be presented as a challenge to the ECB’s latest fiscal strategy.

The central bank raised its inflation target to two percent in July and vowed to keep up a “forceful and persistent” policy to counter it.

Economist Salomon Fiedler, of Berenberg, suggested the ECB could raise its inflation and growth targets next Thursday.

He said: “This could be the basis to reduce the pace of bond purchases under the pandemic emergency purchase programme in the fourth quarter, possibly to a rate between that of the first quarter and the faster rate which the ECB had adopted thereafter.”

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