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Euro zone inflation hits 13-year high in October

Euro zone inflation rose to 4.1% in October, up from 3.4% a month earlier and ahead of a consensus forecast of 3.7%

Euro zone inflation shot past expectations in October to hit a 13-year high, worsening a policy headache for the European Central Bank, which has consistently underestimated consumer price growth over the past year.

Inflation in the 19 countries sharing the euro rose to 4.1% in October, up from 3.4% a month earlier and ahead of a consensus forecast of 3.7%.

It was driven by higher energy prices, tax hikes and growing price pressures from supply bottlenecks that are constraining industrial production, particularly in car manufacturing, data from Eurostat showed today.

The figure is the highest since July 2008 and equals the fastest rate since the data series, known as the harmonised index of consumer prices, was launched in 1997.

Eurosat has estimated that Ireland’s annual inflation rate rose sharply to 5.1% from 3.8% in September. The CSO will publish its final inflation figures for October later next month.

Tánaiste Leo Varadkar has said there has been an undeniable return to rising inflation and that was why the Government had a welfare and income tax package in the Budget.

Mr Varadkar also said there would be pay increases across the economy, including an increase in the minimum wage and higher pay for construction workers.

He added that the Government anticipates that inflation will peak next year and then fall.

But he warned that the era of low interest rates was coming to an end and he said people must prepare for that.

Euro zone energy prices alone were up 23% compared to a year earlier, making by far the biggest contribution to inflation. Services, which had shown anaemic price growth for years, saw inflation of 2.1%.

At 4.1%, consumer price growth is now more than twice the ECB’s target.

It will likely accelerate further in the coming months before a slow retreat next year when some technical one-off drivers get knocked out of year-earlier figures, analysts and ECB policymakers predict.

ECB President Christine Lagarde

But all indicators suggest that inflation will decline more slowly than policymakers once thought, raising the risk that high prices, even if temporary, would become entrenched in wages and corporate pricing structures.

Indeed, ECB President Christine Lagarde took a more cautious tone on inflation this week, warning that supply disruptions would last longer than once thought, keeping consumer price growth higher for longer and putting pressure on wages.

Underlying prices, a key focus for policymakers as they exclude volatile food and energy prices, also accelerated above the ECB’s target.

Core inflation excluding food and fuel prices and a narrower measure that also excludes alcohol and tobacco products, both picked up to 2.1% from 1.9%.

Adding to inflation concerns, an ECB survey today indicated that over 30% of companies surveyed by the bank expected supply constraints and higher input costs to last for another year or longer, while a slightly lower percentage of respondents predicted difficulties would last another six to 12 months.

Firms also reported “a scarcity of applicants” for jobs as people changed profession, country or lifestyle, which was likely to result in wage increases.

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