Euro-Area Inflation Is Diverging the Most Since the Debt Crisis
Inflation is soaring across the euro area, but it’s also diverging by the most in years in a further complication for the European Central Bank’s ongoing pandemic stimulus.
How quickly consumer prices are rising depends on where you are inside the 19-member currency bloc. In Estonia, where energy costs are surging, the 2021 rate is forecast to be 4%; in Greece, where they’re regulated, it’s seen at just 0.1%.
While differences between euro-area countries are nothing new, that’s the widest gap since the region’s sovereign-debt crisis -- underlining the shortcomings of a one-size-fits-all approach to monetary policy.
Some of the loudest grumbling is coming from inflation-averse Germany, where prices are advancing at the quickest pace in three decades as supply-chain hiccups disrupt its manufacturing industry. Its likely next finance minister is sounding the alarm.
“The pressure on the ECB is rising,” said Gertrud Traud, chief economist at Helaba in Frankfurt. The problem with the current spike in prices is that “one doesn’t know if it’s short-term or long-lasting.”
ECB President Christine Lagarde is “confident” the current bout of elevated inflation won’t require higher interest rates next year and will ease once the supply-chain snarls are resolved. But it’s already proving more persistent than earlier thought.
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“The energy price shock has therefore left the ECB facing significantly above-target inflation, but a slower economy. Deciding how to respond depends crucially on inflation expectations. If anchored, the shock will pass, leaving a softer economy in its wake and below-target inflation in the medium term.”
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The European Commission predicts euro-area prices will rise by 2.2% next year -- above the ECB’s 2% goal. Austria’s Robert Holzmann said this week that he couldn’t rule out a “a long period where inflation will be higher.”
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% compared with a projection of 3.1% for this year.
With October’s reading clocking in at 4.6%, hurting both savers and less-well-off Germans, the Bild tabloid has taken aim at the ECB’s ultra-loose monetary stance. Christian Lindner, whose party will form part of the next ruling coalition and help pick a replacement for Bundesbank President Jens Weidmann, warned recently that inflation risks were being “systematically” underestimated in Europe’s largest economy.
The tussle to figure out where prices are headed comes just five weeks before ECB policy makers recalibrate their stimulus. While pandemic asset purchases will probably end as planned in March, there’s no consensus on what will happen to the conventional bond-buying plan -- currently running at 20 billion euros ($23 billion) a month.
With inflation likely to accelerate further in November, a rift is opening among rate-setters. Ireland’s central bank chief Gabriel Makhlouf said he’d prefer to act sooner rather than later, if needed, while his Portuguese counterpart, Mario Centeno, warned against stifling economic momentum with a premature move.
At the back of their minds will be the missteps of the past -- specifically 2011, when then-ECB chief Jean-Claude Trichet raised rates twice, only to have his successor Mario Draghi reverse them.
“The ECB always has to focus on the euro-area aggregate,” Societe Generale SA economist Anatoli Annenkov said. “So far, they’ve managed these divergences pretty well.”
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