Original title: Eurozone inflation “high fever” is hard to retreat where monetary policy will go Source: Xinhua News Agency
Xinhua News Agency reporter Shen Zhonghao Kangyi
Preliminary statistics released by Eurostat on the 1st showed that the inflation rate in the euro zone reached 3.4% in September, which was higher than market expectations and hit a 13-year high. The major economies of the Eurozone, Germany, France, and Italy, climbed to 4.1%, 2.7%, and 3% respectively, all of which were at historical highs.
Analysts believe that the atypical economic recovery under the new crown epidemic is pushing the euro area out of a cycle of low inflation that has lasted for several years. The continued “high fever” of inflation is not only the result of recent high energy prices, but also reflects the imbalance between supply and demand in the current economic recovery process, and supply bottlenecks continue to push up commodity prices. Inflation remains high, the road to economic recovery is still full of uncertainty, and the direction of the European Central Bank’s monetary policy is a cause for concern.
Data show that in September, energy prices in the Eurozone rose 17.4% year-on-year, prices of non-energy industrial products rose 2.1% year-on-year, and service prices rose 1.7% year-on-year. That month, the core inflation rate excluding energy, food, tobacco and alcohol prices was 1.9%.
Energy prices were the main cause of inflation that month. Last year, the global spread of the epidemic caused the world economy to “shut down” and international energy prices plunged sharply. The sharp increase in energy prices this year is the result of the superposition of the base effect and the economic recovery, and at the same time the intensified contradiction between supply and demand has become one of the reasons.
European Central Bank President Lagarde recently pointed out at the online central bank forum hosted by the bank that wind power generation in Europe is low this summer, and conventional energy is needed to fill the gap, which to a certain extent leads to the continuous rise of European natural gas prices and a greater dependence on natural gas. The prices of high downstream industries such as fertilizers and food packaging have risen accordingly.
She emphasized that the Eurozone is experiencing a very unusual recovery. This atypical recovery is manifested in rapid economic growth, but supply bottlenecks appeared prematurely, and inflation rebounded rapidly as economic sectors reopened.
Analysts believe that the global manufacturing supply-demand contradiction caused by insufficient upstream raw materials, poor transportation, and surge in downstream demand is still fermenting. Taking chips as an example, global demand is expected to exceed production capacity next year, and the automotive industry may not be able to obtain sufficient chip supply by 2023.
Carsten Brzeski, head of the Macro Research Department of ING International, believes that the supply bottleneck has lasted longer than expected. At the same time, compared with the previous practice of lowering profit margins to absorb higher costs, production companies “seem to be more willing to pass on high costs to consumers now.”
Jorg Kramer, chief economist at Commerzbank, said that even if the pressure of rising prices in the euro area may be reduced next year, in the long run, inflation is still a problem for Germany and the euro area as a whole.
For the European Central Bank, which has maintained medium-term price stability as its monetary policy objective, changes in and expectations of inflation in the euro zone directly affect its monetary policy decisions. However, although the European Central Bank raised its 2021 inflation forecast for the Eurozone to 2.2% in early September, it still insists that the current high inflation is only “temporary” and said it will maintain its stance of loose monetary policy.
In the view of the European Central Bank, excluding the “one-off” effects such as energy prices, base effect and Germany’s 2020 VAT rate cut, core inflation in the Eurozone remains low and unstable.
Lagarde believes that in the medium and long term, structural changes in the Eurozone economy, including new trends on the demand side and supply side, and changes brought about by the transition to a low-carbon economy, may either push up or pull down inflation. The inflation rate in the euro zone is expected to reach the policy goal of stabilizing at 2% in five years.
Lagarde said that in the face of uncertainty, the ECB’s monetary policy is committed to ensuring that all economic sectors receive favorable financing conditions during the epidemic. After the epidemic is over, the European Central Bank will continue to adopt forward-looking guidance on policy interest rates and asset purchase plans to ensure that monetary policy supports the euro zone in achieving its medium-term inflation target.
Brzeski believes that in view of the higher-than-expected rise in inflation, the European Central Bank may cut its asset purchase plan in 2022. Some analysts also pointed out that although high inflation is worrying, if the European Central Bank withdraws from the loose monetary policy, it may curb economic recovery on the demand side, affect corporate investment and household consumption, and may even induce stagflation.