Last month, inflation in the eurozone soared to 2%, slightly beyond the European Central Bank’s objective.
A sharp increase in energy prices from a year earlier pushed prices higher, pushing inflation to its highest level since October 2018.
It comes as Covid restrictions have been eased across Europe, resulting in increased economic activity.
The figure is relevant to a discussion regarding whether inflation could become a big issue following the pandemic.
For much of the last decade, central banks in the developed countries have been concerned about low inflation.
Inflation is rising as nations recover from the pandemic-related downturn.
Smallest possible margin
The European Central Bank has set a target of less than but near to 2% for the eurozone. The net result is therefore above the target, though by the lowest conceivable margin.
Inflation in the United Kingdom has also risen, with the current figure of 1.5 percent, up from 0.7 percent the previous month but still below the Bank of England’s objective.
Last month, the Federal Reserve’s inflation index was 3.6 percent in the United States. Like the Bank of England in the United Kingdom, the Fed has set a target of 2%.
Inflation in the eurozone is (barely) above target for the first time in more than two years. Eurozone inflation has been below 1% for most of the period since the pandemic began, and it was below zero for five months until December last year.
So that’s a significant increase in the first half of this year.
Capital Economics’ Andrew Kenningham expects it to rise even higher in the second half of the year, to an average of 2.5 percent.
However, he believes it will only be temporary.
Energy prices are mostly to blame for the rise in inflation. During Europe’s first shutdown, they plummeted.
Around a year ago, the energy market was so volatile that some US crude oil prices dropped negative, below zero, despite the fact that consumer energy supplies were never that cheap.
Energy costs have risen and are now 13 percent higher across the eurozone than they were a year ago, despite the fact that economic activity has recovered most (though not all) of the lost gain.
Apart from energy, consumer prices in the eurozone grew by a very modest 0.9 percent, still well below the ECB’s target.
The effects of the oil price rise will fade over time, and Andrew Kenningham expects most of the inflation increase to be reversed next year.
Other variables, he says, could force prices up, such as a boost in demand for travel and hospitality, which might lead to some price increases.
Consumers may be affected by supply chain interruptions that raise input prices for the manufacturing industry.
Many experts believe that the price increase will be only temporary in the eurozone and other places.
However, other analysts believe there is a chance of a longer-term rise. The increase in consumer spending may be more widespread than the increase in tourism expenditures.
People will want to spend a lot of their pent-up savings. Furthermore, others believe that the large boost supplied by government expenditure and central bank policies in many nations may result in significantly greater inflation.
Andy Haldane, the Bank of England’s top economist, talked in February about the significant level of uncertainty around inflation’s prognosis in both directions. He stated that there is a “tangible risk” that inflation will be more difficult to control than the financial markets anticipate.
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