Frankfurt The inflation rate in the euro area continued to rise in August. Consumer prices increased by 9.1 percent compared to the same month last year. This was announced by the European statistical office Eurostat on Wednesday. This is the highest level since monetary union began. In July, inflation was 8.9 percent.
Until recently, investors had expected the ECB to hike interest rates by 0.5 percentage points, as it did in July. In the meantime, many experts are even expecting a mega rate hike of 0.75 percentage points. The new figures are likely to provide supporters with further arguments.
This includes Bundesbank President Joachim Nagel. “For more and more people, the high inflation is becoming an enormous burden,” he commented on the record value. There is a risk that the phase of high inflation will last longer and that the current wave of inflation will only slowly subside. “Therefore, there is an urgent need for the ECB Governing Council to act decisively at its next meeting to fight inflation,” Nagel said. “We need a strong interest rate hike in September.”
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The chief economist at KfW-Bank, Fritzi Köhler-Geib, called for consistent action by the central bank to combat inflation. A trend reversal is still a long way off. “The unabated rise in food and energy prices should push inflation in the euro area to over ten percent in the last few months of the year,” the economist expects.
Other experts share this assessment. Commerzbank economist Christoph Weil also expects a further increase to over ten percent. The ECB is aiming for a value of two percent in the medium term. The inflation rate has continued to move away from this since the middle of last year.
According to Weil’s calculations, the expiry of the nine-euro ticket and the fuel discount in Germany at the end of August alone will cause the rate in the currency area to rise by 0.3 percentage points.
In addition, there is likely to be a further surge in prices in the coming months due to the rise in gas prices. Due to the delivery restrictions from Russia, market prices for gas have recently risen extremely. However, due to long-term supply contracts, these are usually only passed on step by step. In the coming months, they are likely to have a greater impact on consumers and inflation as a result of the gas surcharge in Germany and other measures.
Energy prices are currently by far the biggest price driver, increasing by 38.3 percent in August compared to the same month last year. Due to the delivery restrictions from Russia, they are currently subject to particular fluctuations. “It’s all about energy prices and we have no idea how to forecast them,” said Frederik Ducrozet, an economist at Swiss wealth manager Pictet.
The dramatic increase in gas prices puts the ECB in an even more difficult situation. Because it fuels inflation, but at the same time weakens the economy. This increases the risk of a recession. This makes the starting point for the central bankers more complicated: interest rate hikes would also slow down the economy.
In recent weeks, high-ranking central bankers have stated that price stability is nevertheless a priority for them.
Isabel Schnabel raises expectations of large rate hikes
Most recently, the German ECB Executive Board member Isabel Schnabel raised expectations of a major interest rate hike. In her speech at the central bankers’ conference in Jackson Hole, USA, on Saturday, she advocated that the central banks had to “act vigorously” in the current environment. France’s central bank chief François Villeroy de Galhau also called for a “significant rate hike in September”.
Dutch central bank governor Klaas Knot also said this week that he was leaning towards a 0.75 percentage point rate hike. But he is open to discussion. The head of the Estonian central bank, Madis Müller, and his Latvian counterpart, Martins Kazaks, also spoke out in favor of discussing this magnitude.
The inflation rate is currently particularly high in the Baltic States. In August it was 25.2 percent in Estonia, 20.8 percent in Latvia and 21.1 percent in Lithuania. The value is currently lowest in France at 6.5 percent.
Among other things, the French government has frozen gas prices for many consumers at the October 2021 level and has limited electricity price increases by law.
In contrast, incomes in the Baltic States are below the average for the euro zone. As a result, people there have to spend a larger proportion on basic needs such as energy and food, where the price increases were particularly extreme.
ECB chief economist Lane urges caution
In the Governing Council, Schnabel, Knot, Nagel and the Baltic central bank governors are advocates of tighter monetary policy. These have spoken particularly loudly in the past few days.
On the other hand, the most prominent advocate of loose monetary policy, ECB chief economist Philip Lane, urged caution. He advocated a steady progression on the course of interest rate hikes that had been taken. “A steady pace – which is neither too slow nor too fast – is important in closing the gap towards the terminal rate for a number of reasons,” he stressed. This statement can be understood as a plea against a mega rate hike.
On September 8, the Central Bank Council will discuss the future course of monetary policy.
(Photo: dpa)
How the ECB’s decision turns out next Thursday should also have a significant impact on the development of the euro exchange rate. In recent weeks, this has fallen below the one dollar per euro mark several times.
Typically, higher interest rates support a currency. Some proponents of a rate hike argue that a stronger euro could quickly curb inflation.
Normally, interest rate increases take a relatively long time to be reflected in price developments. However, in the case of the exchange rate, the effect is faster.
Commodities such as oil and gas are priced in dollars. The weakness of the euro is therefore driving up price increases there. If, on the other hand, the European currency appreciates, this could dampen price developments.
However, economists dispute the importance of the euro exchange rate for the development of inflation. Since the euro zone is a large economy, the impact should be less than in small countries that do a lot of trading.
The International Banking Federation’s (IIF) chief economist, Robin Brooks, argues that the weak euro is fundamentally justified because the sharp rise in energy prices has significantly worsened trading conditions for Europe. The continent is a net importer of oil, gas and other commodities. The rise in the price of these goods is therefore making Europeans poorer overall. In the USA, on the other hand, which largely covers its own needs, this only leads to a redistribution of income.
More: Inflation in Germany rises to 7.9 percent – and is likely to remain high longer than expected