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Euro zone inflation confirmed at record high 8.1% in May

Published 06/17/2022, 05:05 AM
Updated 06/17/2022, 05:17 AM
© Reuters. FILE PHOTO: A vegetable seller, wearing a protective face mask, works on a local market amid the coronavirus disease (COVID-19) outbreak in Nice, France, March 4, 2021.   REUTERS/Eric Gaillard

© Reuters. FILE PHOTO: A vegetable seller, wearing a protective face mask, works on a local market amid the coronavirus disease (COVID-19) outbreak in Nice, France, March 4, 2021. REUTERS/Eric Gaillard

FRANKFURT (Reuters) - Euro zone inflation rose to a record high 8.1% last month in line with a preliminary estimate, more than four times the European Central Bank's target and underscoring its plans to raise interest rates next month to tame runaway price growth.

Initially driven by post-pandemic supply shortages and soaring energy prices following Russia's invasion of Ukraine, inflation has now become increasingly broad, affecting everything from food and services to everyday goods.

Price growth across the 19 countries sharing the euro rose to 8.1% in May from 7.4% in April, in line with a preliminary estimate published on May 31, the European Union's statistics agency Eurostat said on Friday.

Though inflation is now four times the ECB's 2% target, policymakers appear equally worried about a quick rise in underlying prices as they suggest that rapid inflation is now getting embedded via second round effects.

Inflation excluding food and energy costs, a figure closely watched by the ECB, accelerated to 4.4% from 3.9%, while an even narrower measure that also excludes alcohol and tobacco picked up to 3.8% from 3.5%.

While a 39% rise in energy costs was the main driver of inflation, unprocessed food prices were up an uncomfortably high 9% and non-energy industrial goods prices rose by 4.2%. The price of services, where wages are a key cost, rose by 3.5%.

Concerned by this price surge, the ECB last week said that it would raise its key interest rates in July by 25 basis points and again in September, when a bigger increase will be necessary if the outlook has not improved.

The two moves would lift the bank's minus 0.5% deposit rate out of negative territory, ending an eight-year experiment with negative interest rates.

Even this July move may be late, however. Nearly every major central bank has already raised borrowing costs, some several times, suggesting that the ECB may have fallen behind the curve.

The problem is that once second round effects start to take hold, inflation becomes entrenched, eventually being perpetuated via a price-wage spiral as workers demand compensation for the loss of their purchasing power.

While wage growth is still relatively muted, it jumped in the first quarter. The ECB, which has persistently underestimated the inflation surge, sees compensation per employee rising by over 4% both this year and next, twice the rate of their historical average.

© Reuters. FILE PHOTO: A vegetable seller, wearing a protective face mask, works on a local market amid the coronavirus disease (COVID-19) outbreak in Nice, France, March 4, 2021.   REUTERS/Eric Gaillard

The euro zone central bank, which has been forced to raise its inflation projections quarter after quarter over the past two years, now sees price growth at 6.8% this year, 3.5% in 2023 and 2.1% in 2024.

These projections were however based on inflation peaking at around 7.5%, a figure that was exceeded last month.

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Biden and Powell, are you listening? Basic math says that if you print money you get inflation. And basic math with an additional component says that if the manufacturing plant (China) slows down due to Covid then supply lines slow down and cause even more inflation. Then add the Russian war and Energy issues to the formula and the dislocation gets even more dramatic. There is plainly NO WAY to muscle the inflation issue now with raising rates. Dislocations NEED TIME to work themselves out. It was enough to muscle the virus with quick helicopter money. But, you guys need to now ACCEPT basic math. Stop the interest rate tightening. It's senseless to reverse inflation after all these components of the math formula have displayed themselves. STOP the madness of thrusting the ppl and their 401k's into yet another chaos. Biden and Powell: Are you doing all this tightening to shift wealth from the people to the financial institutions who use leveraged shorting techniques to bankrupt us?
All of this 'inflation shocker' is basic math and dramatization JUST to get the algos all jittery and cash in on the hype. You print money you get inflation. No rocket science and all PREDICTABLE from the start. The formula starts with communists being vain, especially the Chinese communists. They need to prove their vain power over the people by shutting down the whole country to manage a few Covid cases, like throwing the baby out with the bath water, or like massive abuse of power to get something done. You get one person willing his way over 1.5 billion ppl and things go wrong pretty quick. Chinese communists all work like that. No surprise. Next element in the formula: China is the factory of the world and under Covid things just don't go that fast anymore. So, you get supply line challenges. In the end, you realize THERE IS NO WAY to ki '_ll inflation now unless you make ppl and their 401k's really sick. RESULT: Accept the basic math that 2 yrs of printing money causes inflation.
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