Europe’s economy is looking bleaker by the day as eurozone inflation hit a new record high this month.
According to flash figures from Eurostat, the European Commission’s statistics office, consumer prices surged 9.1% in August, outpacing the consensus forecast of 9%, and up from 8.9% in July.
This is the ninth consecutive record for consumer price rises in the region.
Germany, the region’s biggest economy, saw inflation reach its highest level in almost half a century at 8.8%, while Estonia currently has the highest inflation rate in the euro zone, at a hefty 25.2%. followed by Lithuania at 21.1% and Latvia at 20.8%.
In contrast, France, Malta and Finland have the lowest inflation rates, at 6.5%, 7.1% and 7.6% respectively.
Soaring gas and electricity prices continue to have the largest impact on inflation, with energy prices now 38.3% higher than a year ago. Indeed, the gloomy new figures come on a day when Europe is facing yet another disruption in Russian gas supplies, with Kremlin-back Gazopram switching off the Nord stream 1 pipeline once again, for purported repairs.
But Russia’s weaponisation of gas isn’t the only supply-side pressure driving inflation.
The knock-on effect of recent heatwaves has also played a part. A plunge in water levels after droughts hit the Rhine River have taken a toll on the distribution of coal, petrol, wheat and other commodities.
The price of food, alcohol, tobacco has risen to 10.6% per year in August, compared to 9.8% in July. And the price of industrial goods has jumped by 5.0%, up from 4.5% in July.
To make matters worse, core inflation – which strips out energy, food, alcohol & tobacco – also rose to a record high this month of 4.3%, over double the European Central Bank (ECB)’s headline target of 2%.
The Euro – much like sterling – is performing very badly against the US dollar, with the euro falling to below parity with the dollar this week. It is now valued below $1 for the first time in over 20 years.
A weaker euro will mean even higher prices for imported goods, including oil, which is priced in dollars.
This drop is largely because Europe is far more dependent on Russian oil and natural gas than the U.S. It is also because the ECB has been less aggressive than the U.S. Federal Reserve in its monetary tightening.
But now it looks likely the ECB will be catching up. The council meets next Thursday to discuss raising interest rates and it is no longer a matter of “if” they will go up, but rather, by how much.
Last month, the ECB lifted rates for the first time in over a decade by a larger-than-expected half-percentage point. Next Thursday, economists are predicting that an even greater rise of 75 basis points could be on the cards.
Hopes of a post-pandemic economic rebound look evermore unrealistic. It seems the euro area is headed for a recession. It’s now just a question of how deep it will be and how long it will last.