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News Item: Eurozone inflation hit record high in December

Soaring energy prices forced the Eurozone’s annual inflation rates to its highest ever level last month, the Eurostat agency said Friday.

Officials and economists expect the rate to fall over the year to come, but the record level will add to pressure on the ECB to reconsider its historically low interest rate policy.

The five percent December figure is a first estimate but confirms a trend that has pushed the rate to a quarter-century high, the peak since records began in January 1997.

These figures are well above the European Central Bank’s target of 2.0 percent inflation in the eurozone, but the ECB believes that inflation should fall in 2023, after peaking in 2022.

The surge in prices in recent months is mainly due to the exceptional rise in gas and electricity prices.

In December, the annual increase in energy prices reached 26 percent, far ahead of the other products surveyed in Eurostat’s basket.

Food, alcohol and tobacco prices nevertheless rose by 3.2 percent, ahead of industrial goods on 2.9 percent and services at 2.4 percent.

Among large countries, the highest increases were in Spain at 6.7 percent and Germany at 5.7 percent.

– Rate rise ‘unlikely’ –

German consumers and policymakers have a historic fear of inflation and the surge in price increases has generated pessimistic media headlines as Chancellor Olaf Scholz’s new coalition government finds its feet.

Conversely, price increases remained more moderate in Italy and France, according to harmonised European data calculated by Eurostat.

Inflation was particularly high in the Baltic States, with the highest level for the euro area recorded by Estonia at 12 percent and Lithuania with 10.7 percent.

Before Christmas, the ECB had raised its inflation forecasts, citing both energy prices and supply chain difficulties in industry, partly caused by the coronavirus epidemic.

Consumer demand is also particularly strong as the single currency area emerges from lockdown measures.

The ECB now expects prices to rise by 3.2 percent in 2022, up from a previous forecast of 1.7 percent.

It only expects prices to fall below its medium-term two percent objective in 2023, and the horizon has become increasingly distant in recent months.

The institution’s president, Christine Lagarde, has deemed it “very unlikely” that its key interest rates, currently at their lowest point in history, will be raised in 2022.

“After reaching 5.0 percent in December, headline eurozone inflation should fall this year as the energy component plummets,” Jack-Allen Reynolds, senior Europe economist for Capital Economics said.

“Another historic figure, but expect decreasing inflation rates from here as energy inflation moderates.” said Bert Colijn of the ING bank.

“Still, core inflation is set to remain above two percent in the first half of 2022 as high producer costs are priced through to the consumer.”