Inflation in the euro zone in May reached its highest annual level since the creation of the single currency in 1999, the European statistics agency said on Tuesday, as the record rise in energy and foodstuffs, caused by the war in Ukraine, continues to affect the continent’s economy.
Posted at 12:00 p.m.
Annual inflation in the 19 countries that use the euro currency hit a record high of 8.1% in May, down from 7.4% in April. Prices have risen for 10 consecutive months and show few signs of abating, deepening the cost of living crisis for consumers and forcing European politicians to promise a series of measures to ease the pain. In the United States, consumer price inflation reached 8.3%, according to April data, a slight moderation from previous months.
The European Commission recently lowered its forecast for economic growth to 2.7% this year, down from the 4% estimated last winter. At the same time, inflation is at record highs and is expected to average 6.8% for the year, according to Commission forecasts, leading a growing number of economists to fear that Europe fall into a sharp slowdown or an outright recession before the end of the year.
Faced with rising inflation, the European Central Bank accelerated its policy response and declared that the era of negative interest rates could end as early as September.
Rise in energy
The cost of energy remains the main driver of price increases for consumers and businesses, with a record increase of 39.2% in May compared to the same month of the previous year, while processed food products , alcohol and tobacco increased by 7%.
European leaders reached a political agreement early Tuesday on an embargo on most Russian oil imports, a once-unthinkable move that aims to punish Russia but which economists say will further hurt industry and households Europeans by pushing up prices.
Germany, Europe’s largest economy, was among the hardest hit, with inflation there rising by 8.7%. France (5.8%), Spain (8.5%) and Italy (7.3%) also saw consumer prices continue to rise over the months, prompting lawmakers of these countries to offer caps on energy prices or reductions for low-income households to offset the cost of gas and diesel.
In Germany, for example, from June the government will offer discounts for the price of fuel at the pump and a monthly pass of 9 euros (C$12.22) for public transport throughout the country.
Rising energy costs have had, by far, the greatest impact on the countries closest to Russia’s borders. Inflation in Estonia, for example, which had previously weaned itself off Russian gas but is now subject to volatile fluctuations in market energy prices, has reached an impressive annual rate of 20.1%, or almost double the 11% recorded in January. In Lithuania, annual inflation reached 18.5%, and in Latvia, 16.4%.
Last year, as inflation began to rise, some European Central Bank policymakers hesitated to act amid weak wage growth in the region. But as consumer prices have continued to climb and spread to more goods and services, the bank is accelerating its process of so-called policy normalization.
In early July, the central bank is expected to end its massive bond-buying program and then start raising interest rates for the first time in more than a decade. Last week, Christine Lagarde, president of the bank, laid out in unusually clear terms the expected path for interest rate hikes, pointing to increases in July and September.
The bank’s chief economist, Philip Lane, recently said the increases were likely to be a quarter of a percentage point at a time, but some politicians have suggested that a larger-than-normal increase, of half a percentage point, could be justified.
This article was originally published in The New York Times.