Inflation continues to run: in June it sets a new record rising up to 8.6%, on average, in the euro area from 8.1% in April, according to preliminary estimates by Eurostat, the European statistical office. The consumer price index also rises in Italy: last month it marked + 1.2% on April, reaching 8% on an annual basis, the new peak since January 1986, when it reached 8.2%. In Spain it is even worse, with the price index rising at 10%, while in Greece at 12%. More contained in France (+ 6.5%), while in Germany, surprisingly, the index dropped by half a point to 8.2% from the previous 8.7%.
Fuel prices on the continent are once again fueled by energy prices, which rose by 41.9% in June from 39.1% in May, due to tensions over Russian gas and oil exports due to the war in Ukraine. In Italy, the rise in the energy market is even more marked, with growth accelerating from + 42.6% in May to + 48.7% in June, mainly due to the rush of regulated energy goods (+ 64% compared to the increase 39.3% of unregulated energy assets).
It also contributes to the price rush the acceleration of processed food prices and no, which in the euro area grew by 8.9% and in Italy by 9.6% in June, pushing even higher our shopping cart, which marks an increase of 8.3%. Core inflation, net of energy and fresh food, accelerates from + 3.2% to + 3.8% and inflation net of energy goods alone from + 3.6% to + 4.2%.
In this increasingly worrying scenariothe European Central Bank is preparing to raise interest rates for the first time in 11 years at the next scheduled monetary policy meeting next 21 July. The increase already announced by President Christine Lagarde will be of 25 points percentages. But at this point it seems obviousa new half point hike in September. More aggressive hikes could follow later, Lagarde teased at the Central Banks Forum in Sintra, Portugal. It depends on the data, which do not bode well for now.
The problem – and Federal Reserve Chairman Jerome Powell made it clear in Sintra – is that the risk of losing control over inflation, with the unanchoring of expectations in the medium term, much worse than the risk of a recession. At least that’s true in the United States, struggling with a healthy economy and a job market that continues to lose millions of workers every month, forcing companies to raise wages and leave many positions uncovered. There are many explanations that experts provide to explain the phenomenon of large resignations, which is fueling a dangerous wage price spiral. This probably also includes the huge amount of money the Fed was pumping into the economy, while rates remained at zero. This sent home values up to new highs and sent stock markets soaring domestic demand. Except for the sudden turnaround which is now depressing the price lists.
In Europe, things are a bit different and for Christine Lagarde the task is more difficult. The euro area economy, after the crisis caused by the pandemic, is slowing down compared to estimates made after the launch of the Recovery Fund, which promises resources and investments in exchange for reforms to modernize economies and accompany the digital and energy transition. The Russian invasion of Ukraine has exacerbated the rise in oil and gas prices, which are already on the rise. While China’s zero Covid policy has prolonged supply chain bottlenecks. Therefore the intervention of the ECB, legitimate, less effective in taming inflation that is not generated above all by the increase in demand, as in America. At the same time, the rate hike could depress the economy and trigger a recession. At the moment it is not seen yet, but it could arrive in 2023.
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