Inflation will remain high in the euro zone at least until the end of the summer, warned Brussels.
Soaring energy prices and supply chain disruptions are to blame.
In the first quarter of this year, inflation will reach 4.8% and will remain above 3% until the third period, according to the latest economic forecasts from the European Commission. The bloc will have to wait until the fourth quarter of 2022 to see inflation fall to 2.1%.
This forecast is based on the assumption that supply bottlenecks will gradually ease and gas prices will decline as temperatures warm and geopolitical tensions between Ukraine and Russia ease.
“Uncertainty will remain high,” said Paolo Gentiloni, European Commissioner for the Economy.
“A pick-up in global inflation could lead to a faster-than-expected tightening of monetary policy, with knock-on effects for global financing conditions and demand.”
The news falls in stride January Readingwhich showed inflation reaching 5.1% on an annual basis, a record figure mainly due to increasingly expensive energy supplies, which recorded a staggering price increase of 28.6%.
Unprocessed foods, such as fresh fruits and vegetables, are also contributing to inflationary pressure due to rising fertilizer costs.
Overall, the European Union will face an average inflation rate of 3.9% for the whole year, a dramatic change after a decade below the 2% mark.
The countries that will experience the most pronounced price increases are Poland (6.8%), Lithuania (6.7%) and Slovakia (6.4%). At the other end, Malta (2.1%), Portugal (2.3%) and Denmark (2.5%) will register more moderate increases, but still above the benchmark for ECB.
Gentiloni added that inflation in the euro zone could fall to 1.7% in 2023.
All eyes on Frankfurt
Thursday’s economic forecast also confirmed that the EU as a whole had returned to pre-pandemic economic levels in the third quarter of 2021, following a strong recovery in the spring and late autumn.
The block is expected to grow by 4.0% in 2022 and 2.8% in 2023. The 2022 figure is slightly lower than the November forecast (4.3%), while the Omicron variant does not was not yet widespread.
The novel mutation of COVID-19, coupled with the ongoing power crisis, caused a drastic slowdown in EU economic activity in the final months of 2021 and continues to dampen growth. Coronavirus restrictions and staff shortages also exacerbated the decline.
“The Omicron variant has spread rapidly, with new daily cases chasing record after record in many countries – although recent days have given rise to optimism that the peak has passed for Europe as a whole. “, said Gentiloni.
The commissioner noted that COVID-19 infections are higher but milder compared to previous waves, resulting in fewer hospitalizations and deaths due to vaccination.
All eyes are on from Brussels to Frankfurt, where ECB President Christine Lagarde has yet to confirm whether her institution will eventually raise interest rates later this year to fight inflation.
Eurozone interest rates have been negative since 2014, a policy introduced by Lagarde’s predecessor, Mario Draghi, in response to low inflation following the European debt crisis.
When inflation rises, interest rates should follow. Those who lend money charge higher rates to ensure they don’t lose value when borrowers repay them in the future.
For months, Lagarde refused to commit to any sort of interest rate hike, but after January’s shocking 5.1% inflation reading, she surprised observers with warmongering comments this implied a desire to tighten monetary policy in line with its US and UK counterparts.