Eurozone Inflation Hits 10%

Where is the inflation coming from:

September inflation in the Eurozone reached 10% moving upward from the previous 9.1% in August. The Eurozone is being heavily impacted in the energy sector due to higher costs from the Russia-Ukraine War. The annual inflation for energy after September goes to aroaring 40.8% compared to August which was 38.6%. Following this is the food, alcohol, andtobacco sector which came in at 11.8% compared to 10.6% in August. This inflation is mainly created by food and energy but this is continuing to broaden out to most sectors ranging fromservices to industrial goods. Germany’s consumer price inflation rose to 10% alone year-on-year in September while the market expectation was 9.4% from a preliminary estimate. The goods inflation increased to 17.2% from 14.7% in August.

Inflation effect on October policy meeting:

In the past two ECB monetary policy meetings, they have raised a total of 125 basis points which is the fastest pace of policy tightening on record. The ECB is meeting Wednesday,October 27, the inflation numbers practically seal the deal for a 75 basis point hike in Interest Rates. ECB officials have every reason to hike rates and act more hawkishly to tame the inflation rise. According to the ECB, inflation is created by demand but as weaker consumerspending continues, this demand-driven inflation may be losing validity. A hypothesis of wherethe inflation is demand-driven is by companies that are still profiting from post-pandemic increased demand but in France, the tourism-driven services recorded weaker inflation than anticipated for September. The ECB waited as long as they could without raising rates but maintaining price stability is their main job right now so they will have to think hawkishly.

Future Outlook:

The inflation peak that the ECB predicted many times could still be months away due to high gas prices and household energy contracts being repriced. The Euro is at a 20-year low against the dollar and this will lead to a rise in imported inflation, especially considering that the bloc’s energy bill is mainly in dollars. The war in Ukraine has to be closely watched by investors, because the biggest issue the Eurozone is facing is energy prices. If the war in Ukraine escalates, we will continue to see a weakened Eurozone economy. The EU imports roughly 25% of its oil from Russia. As the winter season approaches, especially Germany, alongside other northern countries will suffer from these increased energy prices to heat their homes during the cold weather. It is unlikely that the rates will stop at 75 basis points moving into the next few policy meetings. While the Eurozone is pushing towards a recession, these rate hikes will dampen the economy. As there are pros and cons to all situations and economies, the ECB has to prioritize inflation before it gets out of control. It is likely the Eurozone is hit with a recession but the current discussion is how long?

Could this go into 2024? How about 2025? There is no telling how long it will take to recover but the consensus believes it will come.