Eurozone inflation is now expected to surge to 5.8 percent for February, up from 5.1 percent in January, according to latest estimates from statistics body Eurostat. Energy continues to be the biggest growing driver of price increases with energy inflation swelling to 31.7 percent in February compared to 28.8 percent the previous month. Costs for food, alcohol and tobacco are also on the rise at 4.1 percent for February, a slight jump from 3.5 percent in the first month of the calendar year. Pantheon Macroeconomics Senior Europe Economist Melanie Debono warned “the (European Central Bank’s) inflation problem is not going away any time soon”.
She predicted inflation would stay “uncomfortably high” in the coming months with the rate remaining elevated if the situation in Ukraine leads to a shortage of gas supplies.
European reliance on Russia for energy is already proving a major challenge, with the price of oil breaking past $110 a barrel and natural gas prices surging 50 percent on Wednesday.
Both Russia and Ukraine are also major exporters of wheat and grain, posing further pressures on food prices.
Monex Europe FX Market Analyst Ima Sammani commented: “The fact that inflation was already continuously surprising on the upside, even before the war in Ukraine had started, increases fears that inflation will be higher for longer, while higher prices may also restrict economic growth if extended for a prolonged period of time.”
The situation presents major questions for the European Central Bank (ECB), which has been going through an evolving stance on Eurozone inflation.
As inflation crept up in late 2021, the ECB had largely stuck to the belief it would prove transitory with president Christine Lagarde dismissing the odds of an interest rate hike before 2023.
More recently the central bank has had to concede inflation is sticking around for longer and higher than thought.
The outbreak of war in Ukraine now leaves it with the dilemma of dealing with soaring inflation but also a potentially fragile economy.
The situation is stark in Germany where central bank the Bundesbank has warned the country is likely to enter a recession while inflation has reached its highest levels in 30 years.
In a briefing note, ING Think Senior Eurozone Economist Bert Colijn predicted the ECB would need a “rethink of monetary policy”.
He explained: “Until a week ago the main concern was around second-round effects of high inflation and a possible wage-price spiral, but thinking has shifted quickly.
“The main risk now seems to be whether the effects on inflation are not going to be seriously stagflationary in the short run as the purchasing power of consumers gets squeezed.”