Inflation FEAR: Why Europe is VERY worried about inflation with pressure piling on the EU

Inflation rates: Martin Lewis discusses the latest

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According to a report published by the EU’s statistics agency on Friday, Eurozone annual inflation surged to 4.1 percent in October. The Eurostat report also showed that quarterly growth accelerated to 2.2 percent in the third quarter, up from 2.1 percent in the second quarter of this year, raising concerns over the European Central Bank’s underestimation of inflation trends across the bloc. 

Inflation is a growing problem across much of the globe, as economic recovery from Covid – coupled with a perfect storm of energy, labour and material shortages – drive up prices.

Spikes of this nature will pinch consumers and businesses, as well as spook financial markets, all of which have a worrying knock-on effect for political powers.

Inflation will, predictably, lead to an increase in the cost of living, squeezing households across the EU and pinching low-income families and younger generations the hardest.

And the knock-on effect will be felt at the ballot box, as voters seek to punish leaders who fail to manage the consequences of economic instability.

France is already seeing the effects of this trend, as the issue of rising prices looks sure to be one of the dominant topics in next year’s presidential election.

A recent poll carried out in France by Odoxa-Groupama showed 90 percent of French people were worried about rising prices and 75 percent said they believed their purchasing power had shrunk.

Opposition parties have already sought to exploit this ahead of the 2022 vote.

Candidates such as the centre-right’s Michel Barnier and far-right’s Marine Le Pen have vowed to cut taxes on gasoline to counter rising energy costs.

And Finance Minister Bruno Le Maire last week presented an “inflation compensation” payment of €100 for citizens earning less than €2,000 per month after tax to the Cabinet, which will now be voted on in parliament.

Concerns over the issue extend well beyond France.

Last week, European Central Bank chief Christine Lagarde said last week that the ECB is “very unlikely” to raise interest rates next year.

This has exacerbated a deepening rift between EU members and the ECB over how rapidly monetary policy should respond to stubbornly high inflation.

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Germany’s criticism of the ECB is gaining ground, with Christian Lindner, a contender for the post of finance minister in the next government, saying he was worried about the ECB’s purchasing of bonds.

Mr Lindner said last week: “The fact that the ECB seems to be acting differently than the [US Federal Reserve] at the moment may, unfortunately, underpin my fear.”

Ms Lagarde, speaking last week, said the bank had not lost commitment to its targets, but that it didn’t see a significant risk of persistent price pressures.

She said: “If persistent bottlenecks feed through into higher than anticipated wage rises or the economy returns more quickly to full capacity, price pressures could become stronger.”

She dismissed chances of raising interest rates because the ECB is “confident” that its expectations of inflation undershooting the central bank’s two percent target over the medium term “is actually correct.”

She said: “While the current phase of higher inflation will last longer than originally expected, we expect inflation to decline in the course of next year.

“We continue to foresee inflation in the medium term remaining below our two percent target.”

But this will do little to comfort nervous European politicians.

Speaking to his fellow leaders at last month’s European summit French President Emmanuel Macron there was no indication energy prices would start falling anytime soon.

“On the contrary, they will continue to rise,” he said.

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