Eurozone inflation soars and puts the ECB on the ropes

Inflation does not give a truce to European economies. In June, prices soared 8.6%, reaching a new all-time high, after having already broken it in May.

Rising energy and commodity prices have been putting pressure on prices for months, to the point that inflation has reached levels not seen since the creation of the euro zone. The the price of energy has risen by 42% in June, and that of food 8.9% in euro countries.

If at the end of 2021 it was at 5%, and in March it touched 7.5%, reflecting the first effects of the war in Ukraine, in May it exceeded 8% and in June it is already close to 9%, according to the latest data published today by Eurostat.

The impact is widespread in all countries. Moreover, if until a few months ago Spain suffered from relatively higher inflation, due to its greater energy dependence; today, several countries are experiencing much larger increases.

Between los Veintisiete, the inflation rate accelerated in June in all the countries, salvo in Germany, when it moderated to 8.2% from el 8.7%, y Países Bajos, when not al 9.9% from el 10 ,May 2.

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The largest price increases in the EU were recorded in Estonia (22%), Lithuania (20.5%) and Latvia (19.2%), while the smallest increases were recorded in Malta (6.1%), France (6.5%) and Finland (8.1%).

The Sword of Damocles, on the ECB

This sustained price tension over time and in its virulence put the European Central Bank on the ropes. Current inflation is more than 6 points above the agency’s targets (at 2%), and continues to tighten, underlining the role of the central bank as a guarantor of monetary stability.

The organization is in charge of maintaining price stability which, according to its objectives, should be maintained at a growth rate of 2%.

Already at the end of May, the body chaired by Christine Lagarde announced a top notch hike in July, 0.25. This is a historic increase, after 11 years of interest rates at their lowest.

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But even then, it was known that this increase would be insufficient to stop the price spike, which is why Lagarde announced that there would be a second increase in September. Now, the problem seems to be that the ECB could fail, which could lead the body to apply a higher hike than expected.

A month ago, Lagarde argued that if inflation continues to rise despite the rate hike expected in July, should apply a go higher than expected at the next meeting of the Board of Governors, which will take place in September.

The balance is complicated: the risk of not acting against inflation could lead to a dangerous spiral price increases, but this could lead to the savings in a recession.

A choice therefore had to be made: get inflation back on track before it was too late by raising rates (at the cost of slowing economic growth) or let the economy continue to overheat without raising rates (at the risk of falling into a dangerous price spiral, into stagflation or even recession).

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