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What does record inflation mean for the euro area?

LONDON (`) – Inflation in the 19 countries using the euro currency has reached its highest level in history, led by rising food and energy costs, figures released on Friday show.

WHAT DO THE NUMBERS SAY?

According to Eurostat, the EU’s statistical office, consumer prices in the euro area, which is made up of European Union economies such as France and Germany, rose 5% in December year-on-year.

Energy prices led the increase, increasing by 26% last year, slightly lower than in the previous month. Food prices accelerated to 3.2% from 2.2% in November, and commodity prices rose 2.9% faster.

However, service price increases fell to 2.4%, suggesting that the Omicron variant of COVID-19 dampened demand for vacation travel. After excluding potentially volatile items such as food and energy, the eurozone core inflation rate remained stable at 2.6%.

WHY IS IT IMPORTANT?

The latest rate surpasses the November record of 4.9% and marks the highest rate of inflation since records began for the euro currency in 1997, two years before it was actually launched.

This means everything from grocery store groceries to shopping trips to fuel is getting more expensive as the economic recovery from the pandemic has increased demand for energy and knotted global supply chains.

The numbers underscore how inflation has become one of the main problems facing economic policymakers.

This increases pressure on the European Central Bank to respond to inflation as it has kept interest rates extremely low to stimulate an economy recovering from the depths of the pandemic. The arrival of omicron has meant that any decisions that could slow economic growth need to be reconsidered, and analysts don’t expect the European bank to hike rates before 2023.

Inflation is not just the EU’s problem. Consumer prices in the US have risen at the fastest rate in 39 years, and in the UK as fast as they have been in more than a decade. Turkish inflation hit a staggering 36% last month – its highest level in 19 years – and in Brazil it rose to more than 10%, the fastest pace in 18 years.

WHAT DO THE EXPERTS THINK?

Some economists believe that inflation in the euro area will soon peak if it is not already. A big factor is natural gas prices, “which have been incredibly volatile in recent weeks and have been a dominant driver of the recent surge in inflation,” said Bert Colijn, chief economist at ING Bank, in a report.

Natural gas and oil prices in the futures markets suggest that energy inflation is likely to have peaked and is about to ease, he said.

“The question now is how steep the downward trend will be,” said Colijn.

He and other economists predict that core inflation will ease this year, but will stay at or above 2%, which will give the European Central Bank some leeway to make an interest rate decision.

WHAT ARE OTHER COUNTRIES DOING?

Despite the rise in the omicrones and their uncertain impact on the global economy, central banks have either hiked interest rates to fight rising inflation, or have taken steps in that direction.

The Bank of England became the first central bank in a large advanced economy last month to raise interest rates since the pandemic began. The European Central Bank has taken a much more cautious approach, but has also decided to cautiously withdraw some of its stimulus measures over the next year.

The US Federal Reserve is moving faster than Europe to tighten lending as consumer prices rose 6.8% in November last year.

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