Friday, January 07, 2022
With 5 percent above expectations
Inflation in the eurozone hits record high
The ECB is already criticized for its zero interest rate policy. Now the pressure on them is likely to grow: inflation in the euro area has cracked the five percent mark. This means that the hope of a decline in the rate of inflation remains unfulfilled. Demands for the interest rate turnaround are getting louder.
Inflation in the euro area surprisingly rose again to a record high in December. Goods and services cost an average of 5.0 percent more than a year earlier, as the Eurostat statistics office announced this Friday for its first estimate. This is the highest value since the statistics began in 1997. In November the rate of inflation was 4.9 percent. Economists polled by the Reuters news agency had expected a decline to 4.7 percent.
The inflation rate is thus far more than twice as high as the target of the European Central Bank (ECB), which is aiming for a rate of 2.0 percent as the optimal value for the economy in the medium term. The strongest price driver was again energy, even if it rose slightly less at the end of the year at 26.0 percent than in November at 27.5 percent. Without energy and unprocessed food, the rate of price increase would have been only 2.7 percent. Food, alcohol and tobacco cost 3.2 percent more than in December 2020. Industrial goods (excluding energy) rose by 2.9 percent, and services by 2.4 percent.
The ECB recently raised its inflation forecast for the new year to 3.2 percent, almost doubling it. Warnings of prolonged high inflation have recently been voiced in the ranks of the monetary authorities. The ECB forecast, according to which the inflation rate will fall below two percent again in 2023, could be a bit too rosy, said the Dutch central bank chief Klaas Knot. Given the high inflation, there is resentment about monetary policy in the German economy.
Expert speaks of destruction of the value of money
“The ECB is not doing too little, it is doing the wrong thing,” said the President of the Federal Association of Wholesale, Foreign Trade and Services (BGA), Dirk Jandura, recently to Reuters. “The fact that it helps stabilize public finances in times of crisis can be politically justified – but not in the long term.” In the long term, this endangers trust in the currency by destroying the value of money. A departure from this policy is therefore necessary. In December, the Governing Council decided to end the bond purchases via the EUR 1.85 trillion emergency pandemic program PEPP from spring.
However, due repayments are to be reinvested at least until the end of 2024. So that the financial markets do not sit on dry land after the PEPP acquisitions expire in April 2022, the ECB is also creating a flexible bridge via the smaller bond program called APP. Its end, which is considered a prerequisite for a turnaround in interest rates, was deliberately left open by the monetary authorities. ECB boss Christine Lagarde let it be known that the zero interest rate policy should also be continued in 2022.