Euro zone inflation hits yet another record high in August

By Al Mayadeen English
Source: Agencies
31 Aug 2022 15:32

National statistics agency reveals that the increase in inflation was driven by higher energy prices, which increased by 44.9% in August compared to 42.9% in July.

The inflation rate hits 8.4% in Italy; the highest level since 1985.

Eurozone inflation has risen to a new high and is expected to reach double digits soon, signaling a series of major interest rate hikes even as a harsh recession appears increasingly likely.

Consumer prices rose more than predicted in August, owing to high gas costs and terrible drought, and further increases are already on the way, implying more pain for people and businesses as they deplete their cash reserves.

This combination of high prices and sluggish growth, known as stagflation, leaves the European Central Bank with only harsh options that will exacerbate the misery of the eurozone's 340 million citizens.

The bloc's stimulus will only fuel further inflation and, in the end, harm the bank's reputation, jeopardizing the very foundations of its inflation-fighting mandate. However, policy tightening will restrict growth even further, aggravating a downturn that is now almost certain to occur before the start of the warm season.

Policymakers will ultimately opt to battle inflation, and rates are likely to rise at every remaining meeting this year, raising borrowing costs for governments, businesses, and families at a time when budgets are already tight.

Wednesday's inflation numbers will bolster the case for an extremely strong 75-basis-point ECB rate hike next week, and policy hawks will face an uphill battle to reduce the movement to a still significant 50 bps.

Inflation in the eurozone's 19 member countries rose to 9.1% in August from 8.9% the previous month, above forecasts once more as price pressures widened.

"The inflation rate is likely to leap upward in September," Commerzbank economist Christoph Weil said. "Consequently, the pressure on the ECB to continue raising interest rates significantly is likely to remain high."

While the increase in food and energy prices was predictable, the increase in service costs and the 5% inflation rate for non-energy industrial products will undoubtedly concern ECB policymakers.

They will also be concerned about the sustained rise in underlying prices, which suggests that high costs are now permeating the entire economy via so-called second-round effects.

Indeed, inflation excluding food and fuel increased to 5.5% from 5.1%, while an even narrower measure that also includes alcohol and cigarettes increased to 4.3% from 4.0%.

"We now expect the ECB to hike by 75 basis points next week even if new staff projections for growth are approaching the downside scenario," Nordea said in a note.

Inflation in Italy hits a new record of 8.4% in nearly 40 years

Preliminary figures issued by ISTAT on Wednesday revealed that Italy's annual inflation rate reached 8.4% this month, the highest level since December 1985, when it was 8.8%.

In July, the inflation rate was 7.9%.

The national statistics agency revealed that the increase was driven by higher energy prices, which increased by 44.9% in August compared to 42.9% in July. ISTAT said its consumer-price index was up 0.8% in month-on-month terms.