Euro Zone Inflation hits Record high in March: How far is stagflation?

2022-07-12 0 By

Source: CBN Original title: Euro zone inflation hit record in March!This week, eurozone economies packed out their first inflation data since the escalation in Ukraine, with inflation hitting record highs in the region’s leading economies.The consumer price index (CPI) in the Eurozone rose 7.5 percent year-on-year in March, up from 5.9 percent in February, according to the latest data from eurostat, the European Union’s statistics office.Energy product prices, up 44.7 per cent year on year, were the most important driver of inflation in the region.In March, consumer prices rose to 7.3 percent in Germany, 4.5 percent in France, 6.7 percent in Italy and 9.8 percent in Spain, the highest since 1981, 1997, 1991 and 1985, according to data from the Multinational Statistics Office for the euro zone.Yang Chengyu, an associate researcher with the Institute of European Studies at the Chinese Academy of Social Sciences, told China Business News that the main reason for the soaring inflation in the eurozone is also on the supply side.Since last year, the problems of insufficient energy supply and disrupted supply chain in the eurozone have continued to ferment, and the recent escalation of the situation in Ukraine has impacted the total supply of the eurozone.Higher inflation will feed through to the broader economy through consumption and investment.Whether eurozone inflation can be effectively lowered in the future depends on the monetary policy of the European Central Bank, but more importantly, whether energy supply and supply chain problems can be effectively alleviated.According to Yang chengyu, the rising prices of energy, food and other commodities have raised the costs of electricity, heating and travel for eurozone residents.These cost increases will affect household cash flow and savings, which will ultimately weaken consumer momentum in the eurozone.”Since household consumption accounts for more than 70 per cent of eurozone GDP, it is the largest share.”The decline in consumer spending will cast a cloud over European growth.”He said.Higher gas, electricity and oil prices will add €230bn to eurozone household spending this year, or 1.8 per cent of eurozone GDP, up from the €100bn forecast in February, according to Bloomberg Economics Research.Meanwhile, total household savings in the euro zone may have shrunk to 330 billion euros last month from the high savings rate at the end of the second quarter of 2021, while lower-income euro zone consumers are not much better off financially.The latest data from eurostat, the European Union’s statistical office, showed that in March, eurozone consumer confidence fell to its lowest level since May 2020, at -18.7.Yang believes that investment is another channel through which inflation affects the eurozone’s macro economy.Surging prices for commodities such as upstream energy have increased raw material costs for industrial companies.In addition, some industrial enterprises are also facing the risk of production shutdown.If these companies fail to pass on the cost burden in time, their profits will be squeezed, which in turn will limit investment.Germany’s producer price index rose 25.9 per cent in February from a year earlier, the biggest rise since the survey began in 1949, according to the federal statistics office.Italy’s PPI rose more than 40 per cent year-on-year in February, according to the country’s statistics office.The German government recently launched an emergency plan to manage gas supplies, saying industrial use would be the first to be cut if supplies were tight.Basf, the German chemicals giant, said that if industrial gas use were to be cut, it would have to reduce production of key basic chemicals and downstream products, which would affect all customers.In addition to the chemical industry, European fertilizer, electrolytic aluminum, steel companies have also issued similar warnings.Back in the 1970s?In a recent research note, Goldman Sachs said the simultaneous rise in energy prices and inflation in the eurozone was “reminiscent of the 1970s”.From the beginning of 1970 to the end of 1979, the global price of crude oil rose from $1.20 a barrel to nearly $40.During this period, Europe and the United States generally have a more serious economic recession.The German government’s most important economic advisory body, the German Council of Economic Experts, announced on March 30 that it will reduce the country’s economic growth in 2022 to 1.8 percent, down from the 4.6 percent forecast last November, due to high energy prices and the situation in Ukraine.Earlier, The Kiel Institute for the World Economy lowered its forecast for German growth in 2022 to 2.1 percent.European Central Bank President Christine Lagarde also said recently, “In the short term, we will face higher inflation and lower economic growth.”But there are still doubts in Europe about whether the eurozone economy is stagflating.Recently, European Central Bank vice President Jose De Guindos said that although the eurozone economy may not grow, there may be some rebound in the second half of the year, which will keep the eurozone economy growing this year.For now, stagflation is unlikely, he said.Mr Yang argues that higher energy prices constitute a classic aggregate supply shock for the eurozone.Whether this will lead to higher inflation and lower output at the same time should be watched whether the prices of energy and other commodities will fall and whether supply bottlenecks can be eased.If the above factors can not be effectively resolved, the eurozone economy will face a serious “stagflation” uncertainty.Recently, the EU and its member states have made frequent moves to diversify energy supplies.Up to now, the EU and some member states have signed additional LNG and hydrogen orders with the United States, Qatar, Norway, Australia and other countries and regions.Angel Talavera, head of European macroeconomic research at Oxford Economics, said in an interview with China Business News that the EU may not be able to find an alternative source of Russian energy in the short term due to limited production capacity, transportation capacity and local acceptance capacity in Europe.Germany may not be able to wean itself off energy dependence on Russia until the summer of 2024, Deputy Chancellor and Minister of Economy and climate Protection Habeck said recently.Mr Taravella also said that even if the EU could diversify its energy supplies in the short term, it would not have an impact on reducing inflation as the EU would pay more for alternative energy sources, such as LIQUEFIED natural gas and hydrogen, because of higher production and transport prices.