The price increases in the Eurozone and the inflation figures reaching a record level again started the fear of “stagflation” in the Eurozone, the single currency unit of the EU. Inflation reached 8.1 percent due to the increase in prices in May. While growth slowed down in the economies of 19 Eurozone member countries, inflation exceeded 10 percent in 6 of them. Economists, pointing out that inflation is increasing faster than expected, warn that the Euro Zone is on the verge of stagflation, which means stagnation in the economy during the period of high inflation.
According to data released by Eurostat yesterday, inflation in Eurozone countries reached 8.1 percent annually in May. This is the highest figure detected since the day the euro was born. This new record was expected around 7.7 percent after the announcement of high inflation rates especially in Germany and Spain on Monday and France yesterday morning. As a result, this record reached 8.1 percent, 0.3-0.4 points higher than economists’ expectations. In the Lehmann-Brothers crisis, which last experienced in the Euro Zone in 2008, the price index that triggered inflation rose to 4 percent.
Along with the rising inflation, the growth figures also slowed down sharply. Prices rose by a record 20.1 percent, especially in Estonia, a Baltic country that suffered the consequences of the Ukraine-Russia war. Only one of the 19 countries in the monetary union, the Netherlands, saw inflation slow in May, but the rate still remained above 10 percent.
In the Eurozone, this rate was determined as 0.3 percent in the first quarter, which covered only five weeks of the war that started in Ukraine on February 24. In April and May, all economic indicators across the region followed a downward trend.
In the Baltic states, neighboring the record war
According to Eurostat data detailing the extent of the inflation shock that has not been seen in Europe since the 1980s, inflation exceeded 10 percent in 6 of the 19 countries included in the single currency zone, the Netherlands, Greece, Slovakia, Estonia, Latvia and Lithuania. The increase in inflation followed the same trend in major Eurozone countries. May inflation was 8.7 percent in Germany, 9.9 percent in Belgium, 8.5 percent in Spain and 7.3 percent in Italy. France, which has nuclear power and applies a “tariff shield” on electricity/gas prices, was the second least affected country with 5.8 percent.
Axa chief economist Gilles Moec, who evaluated the May figures for the French media, said: “High inflation and the fall in the gross domestic product, and France’s participation in Italy in the negative region, revive the fears of stagflation.” “The war in Ukraine and China’s zero-COVID strategy are creating an unprecedented peak of inflation and a deep recession in growth in the euro area,” said Ludovic Subran, chief economist at Allianz.
Spreading from energy to the entire economy
The main reason for the increase in inflation is energy prices, the cost of which has increased by 39 percent in a year. However, gradually, this trend is spreading throughout the economy. In Europe, food prices in the Eurozone increased by 7.5 percent. Excluding energy, food, alcohol and tobacco, “core inflation” continued to rise in May, increasing by 3.5 percent compared to the previous month and by 2.3 percent compared to the figures in January.
Consumer confidence has dropped
According to the “household confidence” calculation of the European Commission, which measures the impact of the increase in inflation on consumers, the impact of these developments on the purchasing power of consumers is quite severe. The household confidence score, which was -1.5 in June last year, fell sharply with the war in Ukraine, according to the commission’s survey, which each month asks the public “whether their finances have improved in the past 12 months and whether they plan to spend heavily in the near future”. and reached -21 percent, reaching the lowest level in the last 20 years.
Another reason that triggers inflation is the Ukrainian-Russian war and the “zero COVID” restrictions in China still disrupting the supply chain. However, sectors are showing stronger resistance to these developments than households. While the “Purchasing Managers Index”, which shows companies’ trends, has fallen in recent months, experts observe that companies are holding up better than consumers than they fear.
European Central Bank’s decision to raise interest rates
Despite the high inflation trend, economists do not expect a recession in the second half of 2022 in the Euro Zone and call the European Central Bank to increase interest rates. “The process should be gradual,” Philip Lane, chief economist of the European Central Bank (ECB), told Spanish media Cinco Dias on Monday (May 30th), talking about two quarter-point increases in July and September. The Governor of the French Central Bank, François Villeroy de Galhau, also proposed a three-stage increase to reach a positive rate by the end of 2022.
However, for eurozone economies that are already slowing down, any increase in interest rates will make borrowing more expensive. This results in both the ECB, finance ministers and central bank governors taking steps by observing a delicate balance. For this reason, it is stated that the ECB, which will meet in Amsterdam next week, may tend to raise interest rates at a ‘more aggressive pace’ than currently stated, in order to ease prices without stifling growth.