In news that’s every bit as disconcerting as it is unsurprising, inflation in the eurozone reached double-digits in September.
Consumer prices probably rose 10% this month (figure below), data out Friday showed.
It was another record and marked the fifth consecutive month that consumer price growth exceeded economists’ forecasts. Core prices rose 4.8%, also a record.
On a monthly basis, headline price growth was 1.2%. Core prices rose 1% from August. Neither of those prints are good news.
Energy inflation was nearly 41% on a 12-month basis this month, Eurostat said. That was the highest since June. Energy prices rose 3% MoM. Annual food inflation neared 13%.
The figures came a day after another harrowing read on price growth in Germany, where inflation is also double-digits, and amid concerns that Europe’s energy crisis is set to spiral further as the economic war between the West and the Kremlin continues to escalate.
Although price growth in France has cooled (to 6.2% this month), inflation continues to rage unabated virtually everywhere else. It’s 12% Belgium and Greece, 11% in Austria, 9.8% in Portugal, 9.5% in Italy and over 20% in Estonia, Latvia and Lithuania. In Spain, the 12-month rate slowed considerably this month, but remained near double-digits after reaching 10.7% in July.
I’ve written voluminously on Europe’s inflation crisis and, specifically, on the extent to which monetary policy is mostly powerless. A few days ago, in “Runaway Inflation In Europe: Does The ECB Even Matter?” I suggested the September CPI print would likely overshoot. The ECB, I ventured, shouldn’t hold out much hope of impacting inflation expectations.
Monetary policy transmission in the eurozone is already convoluted enough given the difficulty inherent in crafting a unitary monetary policy for disparate countries all running different fiscal policies. When you throw in the dominance of food and energy in the inflation mix, it’s not obvious that the ECB can materially impact the expectations channel, let alone in any uniform way across locales. (I do encourage readers to peruse the linked article in the context of Friday’s above-consensus CPI print.)
Christine Lagarde is, of course, aware that monetary policy may prove insufficient to arrest runaway price growth in Europe, but she’s compelled to hike rates aggressively anyway. On that score, there’s a long way to go. Even after this month’s 75bps move, the bank is “still far away from rates that are consistent with 2% inflation,” as Governing Council member Martins Kazaks put it Wednesday (figure below).
In all likelihood, the ECB will opt for another 75bps hike at its next gathering, but it won’t matter. Inflation outcomes in Europe are almost solely dependent on the evolution of the energy crisis which, in turn, depends on the war in Ukraine.
Consumer expectations — not just for inflation, but for the economy more generally — turn on power bills and the perceived effectiveness of fiscal initiatives aimed at capping energy prices. But there’s a paradox: The more effective such measures are, the higher the risk of entrenched inflation. That’s the demand construction versus demand destruction debate. Forestalling creative destruction is counterproductive when you’re at war with inflation, but Europe is also at war with Vladimir Putin’s Russia, and governments are understandably reluctant to acquiesce to a reality where Putin forces European households to choose between freezing and going bankrupt.
“The risks to the inflation outlook are primarily on the upside, mainly reflecting the possibility of further major disruptions in energy supplies,” Lagarde told lawmakers on September 26, adding that the ECB “expect[s] to raise rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations.”
C’est la vie.