Eurozone inflation hits 7.5 percent as energy prices rise

PARIS — Soaring energy and food prices, fueled by Russia’s ongoing aggression against Ukraine, pushed inflation in Europe last month to levels not seen in four decades, with prices in the 19 countries that using the euro has skyrocketed by 7.5 percent, according to data released by Europe’s Statistics Agency on Friday.

The unprecedented rise in prices from already record levels was the latest indication of how quickly the fallout from the war in Ukraine is affecting the European economy, putting pressure on the European Central Bank to potentially start raising interest rates before the end of the year the year.

“The inflation rate is again significantly higher than we expected,” Bundesbank President Joachim Nagel said on Twitter. “Monetary policy should not miss the opportunity for timely countermeasures.”

Rising energy costs pose the greatest threat as they have caused European businesses and households to experience a sharp rise in costs and slowed Europe’s economic recovery from the Covid-19 pandemic. Energy prices soared nearly 45 percent year-on-year in March as the conflict prompted dizzying jumps in natural gas, electricity and oil prices.

Europe and the United States are making ambitious plans to reduce dependence on Russian energy to offset threats to Europe’s economy and energy security. Last week, the United States agreed to increase supplies of natural gas to help Europe wean itself off Russian energy.

Germany, the largest user of Russian energy in Europe, also wants to halve its imports of Russian oil and coal this year and end its dependence on Russian natural gas by mid-2024. Europe’s largest economy, Germany, is already suffering an economic hit from the crisis. The German Economic Advisory Council, which advises the government in Berlin, reduced its growth forecast for 2022 by more than half to 1.8 percent this week.

Adding to the economic strain on Europe is rising food costs as supplies of wheat, corn and barley have been trapped in Russia and Ukraine, which produce much of these crops for world consumption.

Unprocessed food prices rose at an annual rate of 7.8 percent last month, Eurostat said. Since the invasion, world prices for wheat have risen by 21 percent, barley by 33 percent, and some fertilizers by 40 percent, threatening a food crisis.

Even excluding food and energy, eurozone core inflation continued to rise as inflation in goods and services accelerated.

The largest overall increases were recorded in Lithuania (15.6 percent), Estonia (14.8 percent) and the Netherlands (11.9 percent). Consumer prices in Germany rose by 7.6 percent compared to the previous year, in Spain by 9.8 percent.

On Wednesday, central bank governor Christine Lagarde said she expected food and energy prices in the euro zone to stabilize at high levels lest the region slide into a mire of high inflation and sluggish growth. The bank recently announced plans to scale back some of its stimulus measures to buy bonds.

But analysts say there is much more pain ahead as the war keeps upward pressure on prices and persistently high energy costs reverberate through the economy. The Kremlin’s threat to cut off European supplies of Russian oil and gas if payments are not made in rubles has raised the specter of even higher energy costs.

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said in a note to clients that prices would rise should Russia cut off gas to Europe, although Moscow is unlikely to take that step. A ceasefire agreement between Russia and Ukraine, if one materializes, would send energy prices plummeting.

But governments across Europe are taking no chances, promising billions in subsidies to protect businesses and households from the pain of rising energy bills that have hurt consumers’ spending power.

“Households are becoming more pessimistic and could cut spending,” Ms Lagarde said in a speech in Cyprus on Wednesday. “The longer the war lasts, the higher the economic costs will be and the greater the likelihood that we will end up in worse scenarios.”

Denmark is providing 2 billion Danish kroner ($299 million) for “heat checks” for over 400,000 severely affected households. France limits rise in regulated electricity costs to 4 percent and spends a total of 26 billion euros to help businesses and households offset higher gas and electricity bills.

In Germany, where the war in Ukraine and inflation have also weighed heavily on consumer sentiment, Chancellor Olaf Scholz’s government has approved €4.5 billion in tax cuts.

The war has also put additional strain on supply chains already stretched by the pandemic and continues to depress producer prices and the cost of goods to consumers.

“The question is whether the worst is now behind us, and that seems doubtful,” wrote Bert Colijn, a senior eurozone economist at ING Bank, in a note to clients, adding that the prospect of double-digit inflation ” cannot be ruled out at this point.” Eurozone inflation hits 7.5 percent as energy prices rise

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