Eurozone inflation rises to record 9.1%

Eurozone inflation rose to a record 9.1 per cent in the year to August, intensifying fears that soaring prices are becoming embedded in the economy and bolstering calls for the European Central Bank to raise interest rates more aggressively next week.

The flash estimate of consumer price growth published by Eurostat, the European Commission’s statistics bureau, on Wednesday was up from 8.9 per cent in July, which was itself the highest level in the 23-year history of the euro. It was also higher than the 9 per cent expected by economists polled by Reuters.

The fallout from Russia’s invasion of Ukraine has sent wholesale gas and electricity prices surging to record levels in Europe in recent weeks and pushed up the cost of fertiliser and other agricultural commodities, such as wheat. The latest rise in food and energy prices is set to exacerbate a cost of living crisis that has hit households and businesses across the 19-country bloc.

Germany’s central bank president Joachim Nagel responded to the news by saying high inflation was “becoming an enormous burden for more and more people”. He added: “We need a strong interest rate hike in September. And further interest rate hikes can be expected in the coming months.”

Eurozone government bonds sold off, sending their yields higher after the data was released, reflecting growing expectations that the ECB will raise rates by 0.75 percentage points for the first time in its history on Thursday next week. The central bank, which targets inflation of 2 per cent, currently has a benchmark deposit rate of zero.

Germany’s 10-year bond yield rose 7 basis points to 1.58 per cent after the inflation number was published, while Italy’s 10-year bond yield rose more than 10 basis points to 3.93 per cent.

The euro fell back below the value of the US dollar to $0.9979, adding to inflationary pressure by raising the price of imports in the eurozone.

The EU is preparing emergency measures to curb the price of electricity by separating it from the soaring cost of gas. News of the preparations has helped to bring wholesale energy prices down from their record highs in recent days.

But a growing number of ECB rate-setters worry the inflationary shock caused by the disruption of the invasion of Ukraine has been accentuated by the reopening of European economies as coronavirus restrictions were ended earlier this year.

The removal of stimulus measures to cushion the blow of higher prices are also expected to lead to more price pressures in the coming months. Economists expect inflation to accelerate further in September, when several of the German government’s measures expire, including a fuel duty rebate and a subsidised €9 monthly train ticket.

“Before the end of the year, we expect headline inflation to hit 10 per cent,” said Jack Allen-Reynolds, an economist at Capital Economics. “With ECB policy rates a long way below appropriate levels, it is clear that the bank will raise interest rates by a larger-than-normal increment next week. A 75 basis point hike looks increasingly likely.”

Further upward pressure on prices is likely, said Commerzbank economist Christoph Weil, “because many companies have not yet fully passed on their higher production costs to consumers”.

Eurostat said energy price inflation decelerated slightly, but still rose 38.3 per cent in the year to August. Price rises of processed food, alcohol and tobacco accelerated to hit 10.5 per cent, their first double-digit increase.

The closely tracked measure of core inflation, which excludes more volatile energy and food prices to give economists a clearer idea of underlying price pressures, rose 4.3 per cent in August, up from 4 per cent in July.

There are also signs of inflationary pressures becoming more broad-based, after goods prices rose 5 per cent — up from 4.5 per cent in July — while services price increases accelerated slightly to 3.8 per cent. Compared with the previous month, overall prices were up 0.5 per cent.

Several ECB governing council members have warned inflation risks becoming entrenched well above target if more consumers and businesses expect it to stay elevated, even if the eurozone slides into a recession this year as many economists are forecasting.

Some rate-setters have called for the central bank to counter this risk with a “front-loading” of the expected path of rate rises by stepping up from an initial half percentage point rise in July to increase its deposit rate from zero to 0.75 per cent at their meeting next week.

But others, including chief economist Philip Lane, have said a “steady pace” of rate rises would be less risky and allow for a future downward adjustment in inflation forecasts.