Inflation in the euro zone reaches 5% and marks another record high

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Inflation in the eurozone rose unexpectedly in December, likely producing more uncomfortable results for the European Central Bank, which has consistently underestimated price pressures and has been criticized for it by some of its own policymakers.

Inflation in the 19 euro-sharing countries rose from 4.9% in November to 5%, a record high for the currency bloc and well above analysts’ expectations of 4.7%.

Energy prices, up 26% year over year, remained the main driver, but the rises for Food, Services and imported goods were also all well above the ECB’s total inflation target of 2%, data from Eurostat shown on Friday.

After the economy revived after its first pandemic shock last year, price growth picked up and caught the ECB – which forecast only a mild rise in inflation a few months ago – unprepared.

Inflation drivers

The upward pressure was compounded by supply chain bottlenecks that reduced the availability of consumer goods, while households forced to save their money for a year began to spend on everything from new cars to restaurant meals.

Most of these inflation drivers are temporary, so price pressures should ease off at some point.

However, there are divergent views about how quickly inflation will fall and where it is likely to settle once the economy adapts to a new normal.

The ECB sees inflation back below 2% by the end of this year, but a long list of influential policymakers questions this statement, warning that risks will be skewed towards higher numbers and that those above target will continue for the next Could last for a year.

Underlying prices

Part of the concern is that underlying prices – or inflation – do not have volatility Food and fuel prices – are also above target, suggesting that sectors that have been vulnerable to weak price pressures over the past decade are now adjusting.

Indeed without inflation Food and fuel prices, closely monitored by the ECB, rose from 2.6% to 2.7% in December, while a tighter gauge that also excludes alcohol and tobacco remained constant at 2.6%. Both numbers were just above expectations.

Nonetheless, the ECB is not likely to take any political action in the foreseeable future.

The bank only curbed incentives a few weeks ago but widened them, so no major stance review is likely before March.

The ECB also argues that wage growth, a requirement for continued price pressures, is anemic, while the rise in coronavirus infections is likely to hold back economic activity and weigh on inflation.

Continue reading: German inflation eases in December for the first time in six months
News from Reuters, edited by ESM. For more retail news, click here. Click subscribe to sign up ESM: European supermarket magazine.
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