Inflation in the euro zone is the one that has diverged the most since the debt crisis
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Inflation is soaring in the euro zone, but it is also diverging the most in years, further complicating the European Central Bank’s ongoing pandemic stimulus package.
How quickly consumer prices rise depends on where you are within the 19-member currency bloc. In Estonia, where energy costs are exploding, the 2021 rate is expected to be 4%; in Greece, where they are regulated, it is only 0.1%.
Although the differences between eurozone countries are not new, it is the largest gap since the region’s sovereign debt crisis, underscoring the shortcomings of a one-size-fits-all approach to monetary policy.
Some of the loudest grunts are coming from inflation-averse Germany, where prices are rising at the fastest pace in three decades as supply chain issues plague its manufacturing industry. His likely next finance minister is sounding the alarm.
“The pressure on the ECB is increasing,” said Gertrud Traud, chief economist at Helaba in Frankfurt. The problem with the current price spike is that “we don’t know if it’s short-term or long-term”.
ECB President Christine Lagarde is ‘convinced’ that the current surge of high inflation will not necessitate higher interest rates next year and will subside once problems in the supply chain resolved. But it is already proving more persistent than previously thought.
The European Commission expects prices in the eurozone to rise 2.2% next year, above the ECB’s 2% target. Austrian Robert Holzmann said this week that he could not rule out “a long period of higher inflation”.
For Germany, the current situation is unusual. The last time its inflation rate topped the bloc’s four biggest countries was half a decade ago, when it was just 0.4% against a projection of 3.1 % for this year.
With an October reading of 4.6%, penalizing both savers and less affluent Germans, tabloid Bild took aim at the ECB’s ultra-accommodative monetary stance. Christian Lindner, whose party will be part of the next ruling coalition and help pick a replacement for Bundesbank President Jens Weidmann, warned recently that inflation risks were ‘systematically’ underestimated in the biggest economy from Europe.
The struggle over where prices are headed comes just five weeks before ECB policymakers recalibrate their stimulus. While pandemic asset purchases will likely end as planned in March, there is no consensus on what will happen to the conventional bond purchase plan, which currently stands at $20 billion. euros ($23 billion) per month.
With inflation expected to pick up further in November, a rift is opening between rate setters. Ireland’s central bank chief Gabriel Makhlouf said he would rather act sooner than later if necessary, while his Portuguese counterpart Mario Centeno warned against stifling economic momentum with a decision. premature.
At the back of their minds will be the missteps of the past – particularly 2011, when then-ECB chief Jean-Claude Trichet raised rates twice, only for his successor Mario Draghi to undo them.
“The ECB should always focus on the eurozone aggregate,” said Societe Generale SA economist Anatoli Annenkov. “So far, they’ve handled those differences pretty well.”
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