Inflation threatens Europe

Inflation in the Eurozone has increased to a record high, since 1997. In many other European countries, prices and inflation also increased, making it difficult for countries to implement economic stimulus packages.

A man shops for groceries at an open-air market as the government is due to announce stricter coronavirus disease (COVID-19) restrictions, in Rome, Italy, March 12, 2021. (Photo: Reuters)
A man shops for groceries at an open-air market as the government is due to announce stricter coronavirus disease (COVID-19) restrictions, in Rome, Italy, March 12, 2021. (Photo: Reuters)

Inflation in the eurozone hit a new record of five percent in December, according to the European Union's statistical arm Eurostat. Preliminary data from Eurostat shows that this was the highest level for the eurozone since recordkeeping began in 1997. It breaks the record of 4.9 percent set in November.

Among the countries which saw steep increases in inflation, was Estonia, with the highest rate at 12 percent, followed by Lithuania with 10.7 percent and Latvia with 7.7 percent. Spain posted an inflation rate of 6.7 percent, while Germany had a rate of 5.7 percent.

Germany's annual inflation rate is expected to reach 3.1 percent in 2021, the highest level since 1993, according to preliminary figures published by the Federal Statistical Office (Destatis).

In another major European economy outside the EU, the UK, commodity prices also increased by 3.5 percent in December 2021, the highest since the beginning of 2020. Analysts warned that inflation may continue to rise until April, when consumers in the "fog country" will face a tax increases and higher energy costs.

Economic experts said that the surge in prices over recent months is mainly due to the exceptional rise in gas and electricity prices. Within a year (up to November 2021), energy prices have increased by 22.1 percent. In December, the annual increase in energy prices reached 26 percent, far ahead of the other products surveyed in Eurostat's basket.

Meanwhile, food, alcohol and tobacco prices nevertheless rose by 3.2 percent, ahead of industrial goods on 2.9 percent and services at 2.4 percent, largely due to supply chain disruptions that made goods scarcer.

The above figures are much higher than the 2 percent inflation target set by the European Central Bank (ECB) for the Eurozone. In recent statements, ECB officials expressed confidence that this level of inflation is temporary and will decrease in 2023, after peaking in 2022. However, experts warn that inflation is still unpredictable and will have long-term consequences for economies.

This is the reason why, in a recent Financial Times survey, the economists on average forecasted the eurozone economy would grow four percent next year, slightly below the 4.2 percent forecast by the ECB, fearing that inflation and the rapid spread of the Omicron variant could drown out Europe's economic prospects in the new year.

However, this is not only a problem of the "old continent", but also a large problem of the global economy, because in many Asian and American countries, the inflation rate is also high. Besides, once the European economy recovers slowly, the general growth engine of the world economy also weakens. In the event, to control inflation, central banks tighten monetary policies earlier and faster than investors anticipate, which can destabilise financial markets and emerging economy.