Inflation in the euro zone rose to 5.8 percent in February. This was announced by the European statistics office Eurostat on Wednesday following an initial estimate. In January, the rate was still at 5.1 percent.The February inflation rate is thus the highest since the introduction of the euro. Above all, energy became more expensive, but also food and services. According to the estimate, energy became 31.7 percent more expensive in February than in the same month of the previous year, after 28.8 percent in January, followed by food, alcohol and tobacco with a price increase of 4.1 percent. Industrial goods excluding energy became 3 percent more expensive, services 2.5 percent, up from 2.3 percent in January.
The Bundesbank, under new president Joachim Nagel, now considers 5 percent inflation on average for the year possible for Germany. The impact of the Ukraine war on the German economy cannot yet be reliably estimated, the Bundesbank said. However, a further surge in energy prices would have an impact on inflation. "A high inflation rate can also be expected for the euro zone," Nagel said. The normalization of monetary policy must therefore be kept in view, he added.
In Germany, inflation rose to 5.1 percent in February according to the national calculation method. According to the European calculation method of the Harmonized Index of Consumer Prices, inflation is already as high as 5.5 percent.
In other euro countries, inflation is in some cases much higher than in Germany; in the Baltic countries, for example, rates have long since reached double digits. In Lithuania, inflation is now at 13.9 percent, in Estonia at 12.4 percent. It had been relatively low in France for a long time, probably partly due to price caps. However, inflation there also rose in February, from 3.3 to 4.1 percent according to European calculations. In Italy, it even rose from 5.1 to 6.2 percent. This was the highest rate since the introduction of the euro, although Italy had already recorded very different inflation rates in the lira era.
The consequences of Russia's attack on Ukraine are hardly reflected; there is a certain time lag in collecting the data. Since then, however, energy prices have risen considerably further. Among other things, the price of oil is now above $100 per barrel for the first time in a long time. The already high price of gas has also risen further. And the gasoline prices hurry from day to day from one historical high to the next: Super E10 costs now for the first time in the history more than 1.80 euro per liter. The price of heating oil also reached a new all-time high of 112 euros per 100 liters on Tuesday.
The hopes of some economists that inflation would fall significantly by the turn of the year proved to be deceptive. It is true that special effects surrounding the pandemic, for example from the temporary reduction in value added tax in Germany, fell out of the inflation measurement. But offsetting effects have apparently more than compensated for this. The European Central Bank (ECB) has also recently admitted that the higher inflation rates have lasted longer than originally thought.
Next week, the Governing Council of the ECB will meet to discuss monetary policy. President Christine Lagarde had been very cautious on Friday about whether the ECB would now postpone tightening its monetary policy. Greek central bank chief Yannis Stournaras had called for the central bank to stay on the ultra-loose course and continue buying bonds, at least until the end of the year, and formally take interest rate cuts off the table. But that does not seem to be the majority view.
Financial markets expect the central bank to act more cautiously than originally planned - but not to forgo the monetary policy turnaround altogether unless the situation escalates further. At present, the situation is so uncertain that the ECB is likely to hold back on the issue next week, said economist Holger Schmieding. But the chances remain good, he said, that after a strong dampener in the coming months, the economy could then return to a strong expansionary course in the summer and fall. "Then, with inflation likely to remain well above the 2 percent target even then, a first interest rate move in December will be possible," Schmieding said: "For now, though, that's not an issue; I'd be surprised if the ECB categorically ruled it out in March."
Jörg Krämer, Commerzbank's chief economist, says: "Before the escalation of the Ukraine crisis, even doves like ECB chief economist Lane had talked about a possible normalization of monetary policy. So basically, a majority in the Governing Council was leaning toward taking its foot off the gas because of high inflation." Whether or not the ECB would actually do so would depend largely on whether or not Russia reacted to Western sanctions by cutting off its gas supplies. "If that were to happen, there would be a threat of an energy crisis that would hit the euro area economy hard." If that became apparent in the run-up to the ECB's March 10 meeting, the ECB would probably not decide to end its net bond purchases as of September, Krämer said: "If, on the other hand, the Russians continue to supply gas and the financial markets remain relatively calm, then the ECB is likely to decide to phase out bond purchases in March, but with a view to possible subsequent interest rate hikes, it would refer more than ever to the development of macroeconomic data."
Image by Gerd Altmann